Activities of O&G players to remain muted

Brent crude futures settled up $1.11, or 2.4 percent, at $47.37 a barrel. It rose to $47.47 at the session high. U.S. crude's West Texas Intermediate (WTI) futures settled up 93 cents, or 2.1 percent, at $45.68 a barrel. The day's peak was $45.80. (A worker looks at a pump jack at an oil field Buzovyazovskoye owned by Bashneft company north from Ufa, Bashkortostan, Russia. - REUTERS filepic

KUALA LUMPUR: Oil and gas (O&G) players would not see a significant pick up in activities as Petroliam Nasional Bhd (Petronas) is expected to maintain its current activity level to conserve its cash, Hong Leong Investment Bank Research (HLIB) said.

“The resilient numbers posted by Petronas would no doubt provide a positive sentimental lift in the stock market. 

"However, we believe that the service players (especially asset players i.e. offshore support vessel (OSV) and rigs) would not see a significant pick up in activities as we expect Petronas to maintain its current activity level to conserve its cash.

"OSV and rig players are still in the oversupply situation (particularly higher-end OSV and jack-up rig segment) with significantly more than enough capacity to cater for the demand at this juncture,’’ the research house said on Tuesday.

The brokerage added it would maintain its neutral stance on the O&G sector and would advocate investors to avoid asset-heavy players whereby the current oil prices would not solve the oversupply issue in that space. 

They should stay on the sidelines but look out for pick up in activities for maintenance-type players i.e. Uzma Bhd (Hold ; target price of RM1.72) to capitalise on potential improvement in activities in the near term.

Petronas reported second quarter (Q2 16) core net profit (excluding net impairments mainly on the upstream assets) of RM9.4bil, bringing its first half  (H1 16) core net profit to RM17.7bil, down 27.3% year-on-year (YoY).

HLIB said it took comfort from the fact that its H1 16 operating cash flow of RM25.6bil was sufficient to cover for its capital expenditure (capex) commitments. However, it noted that the group was still required to pay RM16bil worth of dividends for its shareholders. 

“With RM6bil already paid, the group may opt to draw from its huge cash coffer of RM112bil as of the last reporting date to fulfil the additional RM10bil worth of dividend payments, still a manageable level for the group given its strong net cash position.

 However, we opine that this could only be sustained for another four to five years before its cash balances dwindle to a more worrying position,’’ the research house said.