Oil and gas sector not seen to turn around soon

Brent crude fell 60 cents to settle at $51.81 a barrel, while U.S. West Texas Intermediate crude slipped 61 cents to settle at $50.18 a barrel.

PETALING JAYA: While the Organization of the Petroleum Exporting Countries (Opec) has indicated that it could cut its oil output by 240,000 to 700,000 barrels of oil per day in its recent meeting in Algeria, most analysts are not assured that the sector would turn around any time soon.

The informal Algiers meet among big oil-producing nations on Sept 29 delivered a positive surprise to the market, with some agreement being achieved on reducing oil production to a range of 32.5 to 33 million barrels of oil per day from 33.4 million.

This cut in production is a first since 2008 and is sentiment positive. Brent oil has rallied by some 10.9% and now trades at the US$51.64 level. Further details will be worked out at the next Opec meet on Nov 30.

Hong Leong Investment Bank Research analyst Lim Sin Kiat believes that this development is not sufficient to improve local oil and gas (O&G) services players’ earnings, as the anticipated oil price improvement is not expected to lift oil producers’ capital expenditure (capex) significantly, at least in the medium term.

“The only company which would be directly impacted by the oil price movement in our coverage would be SapuraKencana Petroleum Bhd. According to our sensitivity analysis, an incremental US$10 per barrel improvement in Brent oil prices would bring about a 42% increase in our current earnings forecast,” he said.

He does not think that the current development will bring about a rerating to the sector, as capex spending is not expected to improve significantly, while the upstream industry still has to face an asset oversupply overhang in the time being.

“Recovery for the industry would be slow next year, with activities expected to pick up but not sufficient to change the current fundamentals of the O&G industry,” he said.

Maybank Kim Eng Research regional O&G analyst Liaw Thong Jung said that the sector remains “sidelined and under-owned”, given the risks and unappealing prospects.

However, he added that the sector offers trading opportunities, from beta plays to attractive valuations.

Liaw said that for service providers, it is about surviving the downturn.

“The ultimate aim is to ride out this cyclical downturn and be lean and resilient. Cost cuts, debt restructuring and asset divestments are priorities over the next 12 months. An absolute recovery is still a distance away but the situation has improved.

Merger and acquisition actions are not entirely ruled out as the market consolidates,” he said.

On a more macro outlook, Liaw said that a rise in global capex and the accelerated rebalancing of the global oil demand-supply situation are the other two key signals it monitors closely for signs of a recovery.

At this juncture, it is not seeing any clear indications of a turnaround in the other two conditions.

Lim added that while any output cut is positive for market sentiment, the proposed cut could be undermined by three main issues.

Firstly, three major countries are exempted from the cut, namely, Iran, Nigeria and Libya, of which the output increase could offset the proposed cut.

Secondly, Opec oil production is still at an eight-year high at this point, and a cut of that magnitude might not be sufficient. Thirdly, with oil prices rallying, United States shale producers could easily ramp up their production within six months due to their short oil investment cycle.

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