PETALING JAYA: The oil and gas (O&G) sector is expected to continue to face uncertainty stemming from the coronavirus (Covid-19) pandemic crisis despite the recent improvement in global crude oil prices.
AmInvestment Research expects companies’ earnings to be worse than during the 2015-2017 period that saw multiple financial distress on O&G companies.
“We expect the massive global demand destruction from the uncertain extent and duration of the Covid-19 pandemic to continue depressing industry sentiment extensively in the foreseeable horizon, ” it said in a report yesterday.
This is despite O&G companies reporting “slightly better” first quarter 2020 financial results.
AmInvestment said of the nine companies under its coverage, five companies reported results that were in line with expectations, with three outperformers namely MISC Bhd, Petronas Gas Bhd and Petronas Chemicals.
Moving forward, it suggested that investors remain cautious, especially on highly geared companies.
“Against the backdrop of a sharp demand drop in upstream oil services, we remain cautious on companies with high gearing levels, ” AmInvestment said.
It expects oil price to trade between US$35 and US$40 per barrel.
Brent crude oil prices have averaged US$41per barrel while the current spot price has recovered to US$39 per barrel from the year-low of US$14 on April 22.
For comparison, the Energy Information Administration’s short-term outlook projects crude oil price to be at US$34 per barrel for this year and US$48 for 2021.
AmInvestment expects many local service providers to be affected by Petronas’ plan to cut its capital expenditure and operating expenditure for this year.
“We maintain our view that most participants in the sector, except those in storage and recurring maintenance services, will be adversely impacted, ” it said.
For companies with upstream production-sharing contracts such as Sapura Energy, these are expected to be impacted by lower prices and offtakes, followed by fabricators such as MMHE and offshore support providers like Bumi Armada and Velesto Energy, it added.
However, AmInvestment said the earnings of service providers involved in maintenance and tank storage facilities such as Dialog Group and Serba Dinamik will be resilient against the cyclical nature of industry dynamics.
Overall, it remains “underweight” on the sector as fair values of selected stocks under its coverage remain pegged to five-year price to book value lows.
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