KUALA LUMPUR: CGS-CIMB Equities Research is maintaining its Overweight rating on oil and gas but highlight risks from the free fall in crude oil prices.
“Dialog and Lotte Chemical Titan (LCT) are potential winners. Key potential losers are Velesto, Petronas Dagangan and Sapura Energy. Yinson and Dialog remain our top sector picks, ” it said on Monday.
The research house said Dialog can potentially benefit from the global oversupply of oil that will need to find storage space, possibly at its short-term independent terminal at Pengerang SPV1.
Conversely, oil production from its production sharing contract (D35, D21, and J4 fields offshore Sarawak) and oil services contract (Bayan field offshore Sarawak) may see lower profitability.
LCT may benefit from margin expansion as naphtha feedstock prices will likely fall faster than the already-depressed petrochemical selling prices.
CGS-CIMB Research said it was reported last Friday by Bloomberg that Saudi Arabia and Russia could not see eye to eye on the proposal by the former to cut Opec+ oil production by a further 1.5 million barrels per day (mbpd) in order to tackle weak oil prices in view of global overproduction and demand that has been negatively impacted by the Covid-19 epidemic.
Opec+ had cut production by 1.2m bpd from the Oct 2018 baseline that had taken effect since Jan 1,2019 but the production cut had expanded to 1.7 mbpd by December 2019, mainly due to voluntary extra cuts by SA. Still, oil prices weakened in 1Q20 as the Covid-19 outbreak hurt demand in China.
As Russia has refused to cut further, Saudi Arabia apparently intends to roll back its voluntary cuts after the Opec+ agreement ends on 31 Mar 2020, with Saudi Arabia intending to increase production from 9.7 mbpd currently to 10-11 mbpd in Apr 2020.
Saudi Aramco is apparently offering large discounts to its customers in Asia, Europe and the US to wrest market share from Russia and engage in an all-out price war.
CGS-CIMB Research said the end game is to bring other Opec+ producers back to the negotiating table and to once again control production in such a way as to keep oil prices high. Brent crude ended last Friday at US$45/bbl, down 32% from a year ago.
“Brent crude bottomed at US$26/bbl in Jan 2016 and some commentators expect prices to hit similar levels again, ” it said.
Following the turmoil, the research house sees the losers are Velesto, PetDag, Sapura Energy and PetChem.
“The implications are generally negative for the Malaysian O&G sector, ” it said.
CGS-CIMB Research said in the 2014-16 oil price downturn, Petronas cut its operating costs at the expense of its suppliers and contractors.
Velesto was hit badly as its long-term rig charters were prematurely ended by Petronas; for FY20F, Velesto has four rigs chartered to Petronas that are due for renewal and these may not be renewed at its assumed higher rate of US$75,000 a day vs. US$70,000 currently.
Petronas Dagangan may be hit by large lagged inventory losses in 1Q20F, which may impact its full-year dividends assuming that it sticks to its historical payout ratio.
Sapura Energy, which already saw core net losses in the past three years, may see its losses remaining large in the foreseeable future if its tender drilling rigs fail to record higher utilisation and rates, its engineering and construction tenders continue to face compressed margins and its oil and gas fields sell their output at low prices (not a good time for its SK408 production to be commissioned).
“Lower oil prices may keep petrochemical selling prices squeezed, keeping Petronas Chemicals’s earnings weak.
“FPSO players are theoretically not affected by the oil price downturn given their long-term contracts but the experience of 2014-16 shows that contracts can fail to perform if the charterer is weak.
“Yinson’s soft underbelly is its monthly charter to PetroVietnam of the FPSO Lam Son, which can be terminated at short notice, and the FPSO Abigail-Joseph, which is chartered to a small O&G independent.
“Having said this, Yinson has already long recovered its investment cost for the FPSO Lam Son while the FPSO Abigail Joseph’s conversion costs have been paid upfront by the charterer.
“For Bumi Armada, its FPSO Kraken is chartered to UK independent EnQuest, which has a weak balance sheet while its ability to weather a long oil price downturn is unclear, ” it said.
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