KUALA LUMPUR: Kenanga Investment Bank Research expects Petroliam Nasional Bhd’s (Petronas) turning more cautious on its spending, this will impact the value chain across the oil and gas (O&G) sector.
In a research note on Monday, it said this lower spending, both at capital expenditure (capex) and operating expenditure (opex) levels, would lead to lowered activity levels especially for local-centric players.
“Lowered capex would translate to greater job deferments across the board and less greenfield contracting opportunities, impacting fabricators (e.g. Sapura Energy, MMHE), hook-up and commissioning works outfits (e.g. Dayang, Cramin), drilling rig providers (e.g. Velesto) etc.
“Lowered opex could also possibly exert margin and pricing pressures on local-centric contractors and services providers (e.g. Dayang, Uzma).
“Generally, lowered offshore activity levels could also translate into lower OSV utilisations, impacting players such as Perdana and Icon, ” it said.
Kenanga Research said locally listed O&G players also posted very poor results sector-wide, with half of our stock universe (seven out of 14 stocks) recording disappointing results all of which can be directly attributed to the Movement Control Order (MCO) impacting operations, as well as effects of declining crude oil prices.
Most notably, the two Petronas heavyweight subsidiaries (namely Petronas Chemicals and Petronas Dagangan) posted severely poorer results, in tandem with its parent company, as lower oil prices have suppressed product prices which led to poorer margins spread.
Meanwhile, almost all equipment and services providers which mainly operate in upstream (e.g. Dayang, MMHE, Uzma, Velesto and Wah Seong) also reported poorer results, citing operational disruptions and project deferments.
Commenting on Petronas’ 2QFY20 results, it said the group plunged into losses as a direct result of plummeting crude oil prices, leading to weaker realised product prices and lower sales volumes.
The group recognised a net impairment charge of RM21bil during the quarter, in line with many of its global peers, to address the downward revisions on crude oil price outlook, and also lowering assumptions for the future performances of its assets and wells.
The group had also incurred a total capex of RM14.8bil in 1HFY20, down from RM15.7b in 1HFY19, although discretionary opex spending still remain flattish.
“As such, we expect further cost saving measures as well as further lowered spending in 2HFY20 in order to meet its guidance of capex reduction by 21% and opex by 12%, ” it said.
Kenanga Research said while 2H2020 will almost certainly see improved results over the 1H, helped by mild rebound in crude oil prices coupled with easing of lockdowns, “we believe oil production and activity levels are still very unlikely to return to pre-pandemic levels at least for the next 12-18 months”.
Petronas is now seeing a long-term crude oil price of US$50-US$60/barrel (as opposed to US$60-US$70/barrel previously).
“As such, we still feel that further impairments, disposals, refinancing, restructuring and M&As are still possible within the sector moving forward as companies undergo cost saving measures in order to meet debt repayment obligations.
“Overall, we maintain Neutral on the sector. Valuations in the sector are still not particularly attractive, and hence, we would prefer to wait for fundamentals to play catch-up before reconsidering entry opportunities, ” it said.
Kenanga Research maintained Neutral for the sector.
It said valuations for the sector as a whole are not particularly attractive –still trading at +two standard deviations above mean forward PER, despite being in the midst of a down-cycle.
Hence, it still does not think that pre-emptively buying into the sector to time a recovery is a viable investment strategy at this point in time (at least not on a broad-based approach).
“For now, we would still prefer to wait for fundamentals to catch up before reconsidering our entry positions. However, should one require exposure to the sector, we will opt to stick to proven resilient names e.g. Serba Dinamik, Yinson and Dialog, ” it said.
Did you find this article insightful?
75% readers found this article insightful