PETALING JAYA: Petroliam Nasional Bhd’s plan to slash its budget could see it saving some RM17bil, but this may be insufficient for the state-owned oil and gas (O&G) giant to weather the challenging economic environment, according to a local research house.
UOB Kay Hian Malaysia Research said even with the US$6bil bonds raised by Petronas last month and its strong cash position of RM144bil, it might not fully protect the group from a perfect storm that will cause more free cash flow downside and an upside risk on dividends.
It said contract deferrals were likely to increase the sector’s earnings risk despite an oil price recovery as Petronas has been slow in implementing cost cuts as compared to its peers.
“We see a protracted period of contract deferrals and renegotiations even if the oil price recovers.
“Velesto Energy Bhd was one of the first listed contractors to guide for a bleak local rig outlook and this may see a spillover to the other upstream value chain, asset utilisation and contractual rates, ” it said in a research report yesterday.
It said this was reminiscent of the 2015 to 2017 period when sector valuations constantly hit new lows in tandem with earnings, despite a recovery in the oil price from US$27 per barrel at the end of 2015 to US$60.
Last Friday, Petronas announced that it planned to reduce its capital expenditure (capex) by 21% and operating expenditure (opex) by 12%.
The group had earlier allocated RM50bil for capex this year, out of which RM26bil to RM28bil are for activities in Malaysia and gave its commitment to strive to minimise the impact on domestic capex.
UOB Kay Hian maintained its “market weight” rating on the O&G sector and advised against investing based on oil price momentum.
Kenanga Investment Bank Research, which maintained its “neutral” call on the sector, said it is unlikely for Brent crude prices to rebound to around US$60 levels in the next six to 12 months even as economic activities progressively resume as the effects of project delays, operational disruptions and margins squeeze could reverberate throughout the sector over the next few quarters.
“We expect the effects (of Petronas’ capex and opex cuts) to cascade down to all value chains across the sector, especially on local-centric players.
“Lowered capex would translate to greater job deferments and lesser contracting opportunities, ” it said, adding that this would impact fabricators like Sapura Energy Bhd, MMHE, hook-up and commissioning works companies such as Dayang Enterprise Holdings Bhd and Carimin Petroleum Bhd, drilling services provider Velesto and FPSO players such as MISC Bhd and Yinson.
Kenanga also said the lowered opex could exert margins and pricing pressures on local centric contractors and services providers like Dayang and Uzma Bhd.
“The overall offshore activities could also translate to slower offshore support vessel (OSV) demands, impacting players such as Perdana Petroleum Bhd, Icon Offshore Bhd and Alam Maritim Resources Bhd, ” it said.
Kenanga also highlighted Bumi Armada Bhd and Uzma as potential bottom-fishing plays as the two counters were trading at discounted valuations of 4 times and 7 times its price to earnings ratios, respectively.
Meanwhile, RHB Research downgraded the sector rating from “overweight” to “neutral”, on the back of expectations of delays in contract awards and activities within the upstream space and forthcoming margin compression alongside rate renegotiations.
Its top picks are MISC and Serba Dinamik.
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