O&G firms expected to continue cutting capex

Oil and gas companies are seen to reduce their capital expenditure this year as demand remains muted on the back of the Covid-19 pandemic

PETALING JAYA: Local oil and gas companies will still cut their capital expenditures (capex) this year as demand for the commodity remains gloomy amid the Covid-19 pandemic.

AmInvestment Bank pointed out that for the first half of 2020 (1H2020), the new contract awards to Malaysian operators dropped 62% year-on-year (y-o-y) to RM2.2bil, with the worst fallout yet to come in 2H2020 onwards.

It added that even though a measure of optimism has returned for crude oil prices, oil producers were expected to proceed with their planned production cuts this year given that demand globally remains depressed amid prolonged movement restrictions and social distancing measures across the new normal.

The research house said this could mean potentially long-term changes in energy usage.

National oil company Petroliam Nasional Bhd (Petronas), which had earlier indicated intentions to maintain domestic capex, announced in May that it will cut 21% for capital and 12% operating expenditure this year. This is similar to the 20% to 30% capex reductions for 2020 which were earlier announced by Exxon Mobil, Royal Dutch Shell, Saudi Aramco and Petrobras.

Year-to-date, Brent crude oil prices have averaged at US$41 per barrel while the current spot price has recovered to US$42/barrel currently from the year-low of US$14/barrel on April 22,2020.

“Even though the United States’ crude oil inventories have risen near the recent all-time high to 539 million barrels, we maintain our crude oil price forecast at US$40 to US$45 per barrel for 2020 and US$45 to US$50 per barrel for 2021.

“For comparison, the Energy Information Administration’s (EIA’s) Short-Term Outlook projects the crude oil price at US$34 a barrel for 2020 and US$48 a barrel for 2021, ” the research house said in a sector update yesterday.

AmInvestment Bank maintained a “neutral” stance on the sector given its mixed number of buy and sell calls.

It also maintained its view that most participants in the sector, except those in storage and recurring maintenance services, will be adversely impacted.

The research house said those with upstream production-sharing contracts such as Sapura Energy Bhd and Hibiscus Petroleum Bhd will suffer from lower prices and offtake, followed by fabricators such as Malaysia Marine and Heavy Engineering Holdings Bhd and offshore support providers Bumi Armada Bhd and Velesto Energy Bhd. “However, the earnings of service providers involved in maintenance and tank storage facilities such as Dialog Group Bhd and Serba Dinamik Holdings Bhd will be resilient against the cyclical nature of industry dynamics, ” it said.

AmInvestment Bank also cautioned against selected high geared companies against the backdrop of a sharp demand drop in upstream oil services. This includes Sapura Energy, which needs to restructure its RM10bil debt by the end of the year. “Other players are relatively comfortable at this juncture as Serba Dinamik recently raised a 10% equity placement while Bumi Armada has reclassified a RM1.3bil short-term debt to long term due to higher asset utilisation.

“While there is a risk that Velesto could reverse to a loss in 2HFY20 due to lower rig utilisation, its gross cash position should be able to meet its debt obligations for this financial year, ” the research house said.

It has a “buy” call on Dialog and Serba Dinamik due to their resilient non-cyclical tank terminal and maintenance-based operations while Petronas Chemicals Group Bhd has a high correlation to the recent oil price upturn.

Its “sell” calls are on Bumi Armada, Sapura Energy and Velesto Energy as it continued to view the low oil prices and earnings of upstream service companies to be worse than the previous 2015 to 2017 downcycle.

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