PETALING JAYA: The oil and gas sector is expected to see contract flows increase in the coming months, to make up Petronas’ underspending in the first half of this year.
Petronas has spent on capital expenditure totalling RM16bil in the first half of 2019, representing 32% of its full year target of RM50bil.
According to Affin Hwang Capital, Petronas has allocated half of the RM50bil for domestic projects.
“We believe activities will remain robust, with domestic upstream capex also guided to be higher at RM15bil, as compared to RM8bil in 2018.
“The total RM50bil guidance is still unchanged, showing Petronas’ commitment to roll out more contracts in the coming months.
“We believe contract flows by Petronas could accelerate in the coming months, providing excitement to the sector until year-end, ” said Affin Hwang Capital in a sector report.
The aggregate sector contract value announced in the 10 months of 2019 was strong at RM49.9bil, compared with RM13.2bil during the same period last year.
Excluding the two giant floating production storage and offloading (FPSO) awards to YINSON and Bumi Armada totalling RM34bil and multiple tanker contracts secured by MISC amounting to RM4bil, normalised contract value was up by 10% year-on-year for the 10-month period in 2019 to RM11.7bil.
Additionally, the jack up rig demand in Malaysia has steadily improved from 10 operational rigs in the first quarter of the year, to 13 to 14 rigs in the third quarter.
This is in line with 16 to 18 rig requirements according to Petronas’ activity outlook.
As such, the maintenance and rigs players could post stronger third quarter results as they benefit from higher job flows.
Daily charter rates (DCR) in the South East Asia region for jack up rig with water depth of more than 350 feet is now in the range of US$65,000 to US$95,000 as compared to US$55,000 to US$65,000 in January 2019.
Meanwhile, the DCR for jack up rig with water depth of less than 350 feet is currently at US$48,000 to US$65,000, versus US$45,000 to US$60,000 previously.
Based on Affin Hwang Capital’s quarterly assessment for the operating cash flow (OCF) of oil and gas companies, the research house noted that small mid-caps were showing signs of improvement.
“We noticed that the companies’ ability to repay their short-term borrowings have generally improved.
“This is due to the better OCF and rationalisation of their respective debts.
“Big caps such as Yinson, Serba Dinamik and Dayang posted weak OCF based on their respective historical three-year trend, while 47% of companies classified under the small-mid cap universe posted healthier OCF quarter-on-quarter, ” the research house said.
For sector exposure, Affin Hwang Capital prefers companies with more exposure to the brownfield work, namely maintenance and jack up segments, as well as good earnings visibility.
However, in view of the recent sector run-up and some stocks under the research house’s coverage nearing its fair values, Affin Hwang Capital recommends profit taking on the upcoming strong third quarter result announcements, as the fourth and first quarters are seasonally weak due to monsoon.
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