THE recovery in the oil and gas (O&G) sector will be slow and gradual, and uncertainties still linger on the supply side.
A Kenanga Research report says it has retained its 2021 average Brent crude price assumption of US$50 per barrel, and opines that sustained Organisation of Petroleum Exporting Countries (Opec) production cuts are imperative to prolonging oil price’s stability.
The research unit points out that supply side uncertainties include Opec’s commitment to maintain production cuts, the resurgence of Libyan oil which may add up to 1.3 million barrels per day (bpd) of global oil output, the possible lifting of the Iran sanctions under the Joe Biden administration which may reintroduce another one million bpd of oil exports, and a potential jump in shale oil production if oil prices breach past their breakeven point of US$55 per barrel.
The International Energy Agency (IEA) reiterates a similar view that existing inventory overhang could linger until the end of the year if Opec turns on the tap, even without fresh surplus during the year.
Kenanga Research also says that based on the recent Petronas Activity Outlook (PAO), activity levels are expected to remain stagnant for the year.
“Most of the value chains are expected to see flattish or lower activity levels in 2021, from 2020. This comes after Petronas’ increased prudence in spending, given its declining net-cash position coupled with higher tax and dividend commitments, and somewhat downplaying the possibility of a recovery to pre-pandemic activity levels during the year, ” says the report.
However, the research unit highlights the brownfield space as a partial winner, given increased activity levels across various value chains, which would benefit contractors such as Uzma Bhd.
Conversely, losers would be value chains that are exposed to greenfield projects – such as fabricators (Sapura Energy Bhd, Malaysia Marine and Heavy Engineering Holdings Bhd or MMHE), hook-up and commissioning (Dayang Enterprise Holdings Bhd, Carimin Petroleum Bhd) and jack-up rig providers (Velesto Energy Bhd).
Kenanga Research has a neutral rating on the O&G sector, and says as a whole, it is rather fairly priced at the moment, trading close to mean valuation levels.
Meanwhile, BIMB Securities Research says it is optimistic about recovery in offshore projects as its expects Petronas to allocate more capital towards the upstream segment, following completion of its Pengerang Integrated Complex project.
The research unit says fabricators will benefit from demand for fixed platforms, with the resumption in new offshore development projects.
The fabricators that have already signed the frame agreement with Petronas include MMHE, Sapura Energy and KKB Engineering Bhd.
It is a six-year, long-term agreement to fabricate fixed offshore platforms for Petronas and petroleum arrangement contractors or PACs – ExxonMobil, Hess Corp, Kebabangan Petroleum Operating Company (KPOC), Repsol Oil & Gas Malaysia Ltd and Sarawak Shell/Sabah Shell Petroleum Company - up until 2024.
BIMB Securities Research also expects recovery for jack-up rig operators such as Velesto Energy in view of higher development activities.
Based on the PAO, Petronas expects demand for jack-up rigs to be stable at seven to 10 units per annum over the next three years.
Based on the research unit’s estimate, this is close to the mid-cycle demand (five-year average jack-up rig demand at 8.5).
To put it into perspective, the local jack-up rig demand ranged between five and 14 units annually during the previous 2016-2020 short cycle.
BIMB Securities Research has also observed that there is a tendency for Petronas to award call-up orders for jack-up rigs instead of committing to long-term contracts as showcased by Velesto Energy’s steady utilisation rate during the third quarter of 2020.
BIMB Securities Research has upgraded Velesto Energy to a buy (from a hold), with a higher target price of 26.5 sen (from 14 sen previously) on steady demand for jack-up rigs in the next three years.
It has also maintained a buy call on MMHE and upgraded its target price to 77 sen (from 42 sen previously), pegging a higher price-to-book (P/B) ratio of 0.6 times for the forecast financial year 2021 (from 0.3 times).
The research unit says this is fair, given the recovery path of offshore projects, and opines that MMHE is well-positioned to secure the Limbayong floating production, storage and offloading (FPSO) topside fabrication and hull conversion works due to the project’s high local content requirement.
MMHE is also currently pursuing modular fabrication projects from Saudi Aramco and Taiwan’s offshore windfarm projects to improve its east yard utilisation rate.
MIDF Research also highlights that based on the PAO, 2021 upstream activity levels are expected to mirror that of 2020 as Petronas remains cautious on the O&G sector recovery.
The research unit says a key opportunity area is in the decommissioning and well-abandonment segment.
This is given as currently Malaysia has over 350 platforms where 56% are operating beyond design life and 18% have been operating for over 40 years, there are more than 3,000 wells where 45% are idle wells and over 500 wells are planned to be plugged permanently by 2030, and more than 750 pipelines, where 38% are operating beyond design life and 4% have been operating for over 40 years.
The key beneficiaries to well abandonment activity would be drilling rig operators such as Velesto Energy and Sapura Energy, as well as hydraulic workover units (HWU) operators such as Velesto Energy.
In addition, key beneficiaries would also include providers of offshore support vessels or OSVs like Perdana Petroleum Bhd, Icon Offshore Bhd, Alam Maritim Resources Bhd as well as lifting services like Favelle Favco Bhd, and third-party drilling services like Deleum Bhd.
Meanwhile, the key beneficiaries to upstream facilities decommissioning are engineering services providers such as Dialog Group and Muhibbah Engineering (M) Bhd, Serba Dinamik, Barakah Offshore Petroleum Bhd and Uzma, as well as decommissioning yard facilities like MMHE and Sapura Energy, and transport and lifting services like Dayang Enterprise Holdings Bhd, Perdana Petroleum Bhd, Icon Offshore, Alam Maritim and Barakah Offshore.