PETALING JAYA: Upstream activities in the oil and gas (O&G) industry are expected to recover in the second half of this year albeit at a gradual pace due to the still high number of Covid-19 cases.
It is noted that upstream activities in the first quarter of the year were dismal, while the sequential recovery in the second quarter came in slower than expected.
Although offshore operations, which are classified as essential services, were allowed to operate as usual following the renewed lockdown on June 1, work progress has been dragged by the shortage of offshore crew due to quarantine requirements and the supply of materials.
Impact to fabrication yards is manageable as they are still allowed to operate at a 60% workforce.
According to RHB Research, many players have been operating at a reduced workforce over the past few months.
“Generally, upstream activities will not be able to resume to pre-Covid levels, but based on our channel checks, industry players are still expecting work orders to pick up in the second half of 2021,” the brokerage said in a report.
“Tendering process is still ongoing but services players have seen some delays and slowdown,” it added.
RHB Research expects international benchmark Brent crude oil prices to average at US$71 (RM295.70) per barrel in the second half of 2021.
Its Brent crude price forecast for 2022 stood at US$65 (RM274.60) per barrel.
The brokerage said the production plan by the Organisation of the Petroleum Exporting Countries plus others or Opec+ should result in a relatively balanced oil market in the second half of this year.
“We believe a clear production plan will help to stabilise the market and the extension of the deal could provide certain supply visibility over 2022.
“While prices should be fuelled by continuous crude demand recovery, we note the supply pressure to increase in 2022 arising from Opec and the potential return of United States production,” it explained.
Opec+ ministers on Sunday agreed to increase oil supply to cool prices that earlier this month climbed to the highest in around 2.5 years as the global economy recovers from the Covid-19 pandemic.
The deal would see Opec+ increasing overall production by 0.4 million barrels per day (mbpd) on a monthly basis from August until the phasing out of the 5.8 mbpd production cuts.
The production deal was further extended to December 2022 whereby a higher production baseline will be effective starting May 2022. Opec+ targets to phase out the remaining 5.8 mbpd production adjustment by September 2022.
Meanwhile, RHB Research expects Petroliam Nasional Bhd (Petronas) to ramp up its capital expenditure (capex) spending in the second half after a slower start to the year.
“The first-quarter spending represented 15%-17% of 2021’s guided total capex of RM40bil-RM45bil.
“The lower capex spending year-on-year was mainly due to project delays and rephrasing of activities as a result of the movement restrictions.
“Overall, we believe the second quarter capex spending may not increase significantly, as compared to the first quarter, but capex spending should ramp up in the second half of 2021,” it said.
RHB Research noted that local services players’ earnings in the first quarter of 2021 were dampened by stubborn Covid-19-related costs. “These players are in the midst of negotiating with their clients to reimburse such costs,” it said.
On the performance of the O&G stocks on Bursa Malaysia, it reckoned that the weak share price performance had been largely due to weak trading sentiment on the local bourse, slower recovery of activities due to the elevated number of Covid-19 cases, and the continuous margin pressure associated with Covid-19 testing and preventive measures.
The Bursa Malaysia Energy Index has been further dragged down by Serba Dinamik Holdings Bhd’s share price, which plunged more than 70% subsequent to the independent review of issues raised by KPMG.
RHB expects O&G counters to see recovery in their share price in 2022 should the pandemic be well contained domestically, and eventually be the re-rating catalysts for these players.
“While we acknowledge that there could be earnings risks in the upcoming second quarter 2021 results for upstream services players, especially those that are manpower intensive, we see the recovery story materialising in 2022,” it said.
Among RHBs top picks include Petronas Chemicals Group Bhd for its exposure to commodity prices; MISC Bhd for its ability to ride on the potential recovery of the tanker market; and Bumi Armada Bhd for its earnings resiliency amid undemanding valuation.
Globally, quoting Rystad Energy, it forecasts that the investment level of all public upstream companies would only grow about 2% to US$390bil (RM1.65 trillion) in 2021.
“This is much lower than budgeted prior to the pandemic.
“In the medium term, global upstream spending is still estimated to register a compounded annual growth rate of 5% to US$480bil (RM2.02 trillion) in 2025,” RHB Research said.