PETALING JAYA: The negative sentiment on oil prices, stemming from the Covid-19 outbreak and Opec+’s failure to cut oil production, is expected to cause a direct fundamental impact on domestic oil and gas companies, just as some of these companies are starting to see an improvement in their earnings.
UOB Kay Hian said that the combination of Covid-19 and Opec+’s failure may force Petronas to take action, potentially reducing activities if the national oil and gas company’s cash flow in the first half of the year is severely impacted.
“Covid-19 will be a triple whammy to Petronas in the form of oil prices (upstream income), petrochemical demand (downstream income) and disruptions or force majeures on long-term liquefied natural gas (LNG) exports (gas and new energy income), ” it said.
Petronas had budgeted its 2020 activities on a oil price assumption of US$50 per barrel and guided for local capital expenditure to rise year-on-year (y-o-y) from RM25bil to RM28bil while its total upstream (and gas and new energy) spending is to be in the range of RM32bil to RM34bil.
The research house added that in the event that oil majors cut capex, especially Petronas, all upstream companies will be affected, including yard and rig players such as MMHE and Velesto Energy.
“Similar to the case in 2014 to 2016, some brownfield and maintenance activities may slow down.
“Sanctioned floating production storage and offloading (FPSO) projects are expected to be the least affected in the upstream value chain if the floor for oil prices does not fall below the expected US$30 per barrel mark, ” said UOB Kay Hian.
AmInvestment Bank expects the new price war impact to likely be worse than the 2014 to 2017 period during which Saudi Arabia waged against US shale oil producers.
This is given that US crude oil production has risen to 13.1 million barrels per day, which translates to an increase of 3.9 million barrels above 2016’s production of 9.2 million barrels when Brent oil price crashed to US$26 per barrel.
Additionally, there is a speculated China oil demand loss of up to three million barrels per day.
This is due to the impact of Covid-19.
As such, AmInvestment Bank has lowered its 2020 crude oil price forecast to US$40 to US$45 per barrel, while crude oil price for 2021 has been revised to US$45 to US$50 per barrel, from US$60 to US$65 per barrel, on the back of rising excess oil capacity that is likely to flood global markets amid weak demand softened by the Covid-19 pandemic.
In spite of the impending negative impact on oil and gas companies, CGS-CIMB highlighted that 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 Dialog’s production sharing contract (D35, D21, and J4 fields offshore Sarawak) and oil services contract (Bayan field offshore Sarawak) may see lower profitability.
“Lotte Chemical Titan may benefit from margin expansion as naphtha feedstock prices will likely fall faster than the already-depressed petrochemical selling prices, ” said CGS-CIMB.