AmInvestment stays Neutral on oil and gas sector, prefers Dialog and Yinson

KUALA LUMPUR: AmInvestment Research is retaining its Neutral outlook on the oil and gas sector as persistent low asset utilisation levels could still lead to negative cash outflows in the first half of 2017.

It said on Wednesday that for Malaysian operators, which operate wholly offshore, oil majors’ lower offshore capex expectations mean that those struggling with high gearing such as SapuraKencana Petroleum, Bumi Armada, Alam Maritim and UMW Oil & Gas will still face stiff headwinds. 

“We prefer companies with stable and recurring earnings such as Dialog Group and Yinson. Our Hold calls are for SapuraKencana, MISC, Bumi Armada and UMW Oil & Gas while Petronas Gas is a Sell due to the upcoming implementation of the incentive-based regulatory tariff-setting mechanism,” it said.

Commenting on Petroliam Nasional’s (Petronas) 4QCY16 financial results, it said core net profit (excluding one-off impairments for assets and wells of RM2.5bil) surged 2.1 times on-quarter to RM5.1bil.

AmInvestment Research said this was largely due to an 8% increase in Brent crude oil price to US$49 a barrel, 6% ringgit depreciation vs. US$, together with a 10% increase in crude oil and gas output.

For 2016, Petronas’ core net profit, excluding impairments of RM19.4bil, was slightly higher by 2% on-year to RM40.1bil, supported by a 3% increase in crude oil and gas output, 6% ringgit depreciation and 22% reduction in operating costs which were mostly offset by a 17% reduction in Brent crude oil prices. 

Petronas reported a RM4.1bil reduction in controllable costs to RM49.1bil while dividends paid to the government dropped 38% % on-year to RM16bil in 2016.

The research house said Petronas’ 4QCY16 total daily output of crude oil, condensates and gas
rose 10% on-quarter to 2.4mil barrels of oil equivalent (boe) with the resumption of the Sabah Sarawak Gas pipeline, higher asset utilisation and efficiencies in Peninsular Malaysia and MLNG Train 9 in Bintulu, Sarawak together with higher output from Indonesia and the Gladstone LNG project in Australia.

Petronas group’s 4QCY16 capital expenditure rose 34% on-quarter to RM14bil, of which 80% was spent domestically, likely on downstream projects such as the US$27bil Refinery and Petrochemical Integrated Development (RAPID), which has reached a completion stage of 60%.

The US$1.5bil Sabah Ammonia and Urea (SAMUR) project is currently in the process of ramping up to full commercial operations with initial acceptance in March this year.

However, AmInvestment Research said the Malaysian upstream capex trajectory still faces weak prospects as Petronas’ 2016 spending fell 22% to RM50bil, underscored by a sharp 90% on-year plunge in new 4Q2016 orders to only RM112mil, awarded to Malaysian operators vs. RM5.3bil in 3Q2016. 

While there have been some recent awards to SapuraKencana Petroleum since the beginning of the year, the rollouts still appear weaker on-year.

The research house noted that according to Barclays’ latest global spending survey of over 200 companies, global oil & gas capital expenditure for 2017, earlier estimated to grow by 5%, is now expected to rise higher by 7% driven by onshore spending. 

Baker Hughes rig count in October has dramatically risen by 87% to 754 for the US and 37% to 1,918 globally from the all-time US low of 404 in May 2016. 

Hence, North American spending is expected to increase by 27% in 2017 vs. a 38% contraction in 2016. The survey showed that 80% of North American E&P companies expect oilfield service costs to increase, primarily in pressure pumping and land drilling rigs.

Barclays’ survey also showed that offshore spending is poised to fall another 20%-25% in 2017, after falling 34% in 2016. 

Contracted floating rigs are expected to fall to 120 from 133 currently. Over 59% of Barclays’ respondents now view less than 25% of cost reductions are structural, vs. 45% of respondents surveyed in September 2015.

Saudi Aramco’s US$7bil investment for a 50% stake in the refinery and cracker project in the Pengerang Integrated Complex (PIC) in Johor has reignited interest in the larger oil and gas hub called Refinery and Petrochemical Integrated Development (RAPID). 

RAPID, which is projected to cost US$27bil and has currently reached a completion stage of 60% as planned. 

Dialog Group, strategically located at the entrance of the massive project, and MMHE’s nearby fabrication yard in Pasir Gudang are expected to benefit from new job flows in the area. Other players hoping to secure some outsourced contract works may be Barakah Offshore Petroleum and Muhibbah Engineering.

“We maintain our crude oil price forecast of US$45-US$50/barrel for 2017 and US$50-US$55/barrel for 2018. 

“This is within Petronas’ 2017 average of US$45/barrel but below Bloomberg’s Brent consensus of US$56/barrel for 2017 and US$62/barrel for 2018 as we view the price direction as tenuous given rising US shale production, which has increased by 6% since August 2016 together with improving rig counts while the market closely eyes breaches in OPEC members’ quota adherence,” it said.
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