PETALING JAYA: Challenges remain in the oil and gas (O&G) sector amid a surge in Covid-19 cases, as well as the withholding of exploration and production (E&P) capital expenditure spending.
According to MIDF Research, a significant uptick in activities within the O&G sector can only be seen in the second half of 2021.
“Going into 2021, both upstream oil producers and O&G service providers will have a big task at hand – to balance future growth as well as business sustainability, while navigating through the current adverse operating environment, ” the research house said.
Several European countries, including the UK and France, have seen a surge in new Covid-19 cases, bringing about a new set of lockdowns that could further derail demand recovery.
MIDF Research highlighted that the pandemic has wiped out 30% of global crude demand in the first few months of its spread and demand has yet to recover to the pre-Covid-19 level.
The International Energy Agency (IEA), in its recent October oil market report, expected overall demand for 2020 at 91.7 million barrels per day (mbpd), which is down by 8.4 mbpd from 2019.
As for 2021, the forecast overall demand for crude oil is 97.2 mbpd, showing a gain of 5.5 mbpd from 2020.
“Our global demand and supply estimates, including an assumption of full compliance with the Opec+ agreement, imply a significant stock draw of four mbpd in the fourth quarter.
“While this is a large change, it is happening from record high levels. With the 1.9 mbpd increase in the Opec+ production ceiling currently planned for Jan 1, there is only limited headroom for the market to absorb extra supply in the next few months.
“Also, there is a risk that the demand recovery is stalled by the recent increase in Covid-19 cases in many countries, ” the IEA said.
Apart from that, MIDF Research said E&P capital expenditure spending will be held back until the end of first half of 2021, which will continue to provide support to oil prices.
Capital expenditure spending for upstream E&P by oil majors has been slashed by 20% to 30% to an estimated US$383bil in 2020, compared with US$539bil last year, in a move to reduce production output and assist in the recovery.
“This is in view of slowing demand attributed to the Covid-19 pandemic which has shrunk China’s demand for crude oil by 20% year-to-date and plunged the world into perpetual uncertainty.
“China’s demand alone accounts for 80% of global oil demand growth in 2019.
“On average, 30% to 40% of E&P capex is allocated for drilling and completion, while around 15% to 20% for subsea production, ” said MIDF Research.
However, overall offshore and onshore E&P activities in the second half of 2020 have remained stable with the absence of any sudden sharp decline or dip in average day rates and contracted utilisation rates.
MIDF Research noted that worldwide drillships have been the most resilient with average daily charter rates surging to above US$300,000 in the third quarter of the year and utilisation rates were maintained above 60%.
Conversely, South-East Asian jackup rigs utilisation rates and utilisation have taken a slight beating in the recent months, though recovery is expected from the dip, with increased drilling activities particularly in the Middle East and Asia-Pacific regions expected, driven by pent-up demand in 2020.
MIDF Research expected demand in South-East Asia to continue its upward trajectory with an average demand of about at least 35 units of rigs in 2021 from the 40.5 units in 2020.
“On the local front, we reiterate our view that companies that have been doing well thus far will continue to perform well and companies that have experienced a temporary decline in the second quarter due to the Covid-19 lockdown are expected to show some form of rebound in the second half of 2020 and into the first half of 2021, ” said MIDF Research, which estimates the price of oil to average at US$51 per barrel for 2021.
In comparison, AmInvestment Bank forecast crude oil at US$40 to US$45 per barrel for 2020 and US$45–US$50 per barrel for 2021, while the US Energy Information Administration projects crude oil at US$41 per barrel for 2020 and US$47 per barrel for 2021.
For the third quarter, the earnings of local O&G companies have largely improved despite sluggish order awards.
AmInvestment Bank said the O&G sector’s core net profit rose 13% quarter-on-quarter (q-o-q) to RM1.8bil, mainly due to Petronas Chemicals’ 2.5 times surge from higher product prices, following a depressed market in the previous quarter.
The rise in the sector’s core net profit was also supported by Yinson’s accelerated floating production, storage and offloading (FPSO) profit recognition.
“Excluding Serba Dinamik’s RM1.5bil data centre project in UAE, third quarter orders for the year have shrank 45% q-o-q to RM895mil.
“Even so, we view the slow order flow as the early stages of recovery for the sector, which plummeted to a three-year low of only RM569mil contracts in the Covid-19-inflicted first quarter of 2020, ” said AmInvestment Bank.
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