Greenfield project awards likely to be disappointing

Petroliam Nasional Bhd (Petronas) and a consortium led by Japan's JXTG Holdings Inc are among the companies interested in buying a stake in India's Bina oil refinery, a source close to the matter said.

PETALING JAYA: Mega greenfield project awards in the oil and gas (O&G) sector this year will be disappointing as local capital expenditure (capex) spending is expected to be largely focused on maintenance and brownfield works, said a research house.

On top of this, said UOB KayHian Research, a severe delay in the go-ahead for the Kasawari project could result in the Limbayong award being delayed to year-end. This is despite bids having closed last month.

Assuming oil prices remain stable at between US$65 and US$75 per barrel, the research house believes the increasing signs of capex spending will include renewable energy ventures and O&G decommissioning.

Petroliam Nasional Bhd (Petronas) was expected to boost its overseas capex, it said.

“However, the general surge in capex for decommissioning and new greenfield projects will likely be from 2020,” it said.

The research house, which maintained its “market weight” stance on the sector, said many O&G stocks remained too locally dependent and will not benefit from Petronas’ overseas upstream focus.

However, it noted that Petronas’ domestic upstream capex was set to improve from RM12bil in 2018 to RM15bil in 2019.

“We understand local activity levels have generally increased, especially for maintenance and brownfield works,” it said.

It likes internationally competitive companies, such as engineering, procurement, construction and commissioning (EPCC) and storage operator Dialog Group and floating production, storage and offloading (FPSO) asset owner Yinson Holdings.

Meanwhile, UOB KayHian Research said it reviewed audited balance sheets and concluded that debt/EBITDA (earnings before interest, taxes, depreciation and amortisation) and forecast trends were important to determine the winners that will benefit from an O&G capex upcycle and vice versa.

It said that while there was no “benchmark” for the O&G industry, it found that international companies targeted less than 5x net debt/EBITDA.

“A low ratio is not only positive for bank covenants, it also gives room to secure new projects,” it said.

For FPSOs, it noted that Yinson and MISC were both at less than 4x net debt/EBITDA, and significantly leaner than Bumi Armada’s 7x-10x.

It said Bumi Armada was a key loser as its debt/EBITDA forecast was still rising, along with other losers like TH Heavy, Alam Maritim, Barakah and Malaysia Marine and Heavy Engineering Holdings which reported negative EBITDA.

Sapura Energy’s ratio, it said, appeared to be high at 10x, although this does not prevent it from gaining more projects.

It said this was because its ratio could improve to 6x after including its Brazilian JV EBITDA, while its group EBITDA was set to improve in FY20.

Other players that are lean, at below 5x debt/EBITDA, and with improving EBITDA outlook include Deleum, Dayang Enterprise, Dialog, Wah Seong, Serba Dinamik, and Velesto Energy.

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