Sarawak’s O&G to benefit from increasing work visibility
KUALA LUMPUR: Sarawakian oil and gas (O&G) players as well as those in the immediate supporting industries stand to gain from an increase in contracts this year.
Affin Hwang Investment Bank Bhd (AffinHwang Capital) made this call based on its compilation whereby the aggregate sector contract value awarded in 2018 stood at RM17.5 billion, an increase of two per cent compared to full-year 2017.
Despite the minimal increase in terms of contract value, the number of contracts awarded in 2018 jumped by 41 per cent which signalled that sector activities are recovering across the value chain and hence benefiting the larger scale of companies.
“One of the other reasons behind this is also due to the new industry norm whereby some contracts are announced without a firm contract value, and the actual value depends wholly on the work orders to be given out over the period,” it opined in its sector report yesterday.
“The nature of these jobs awarded includes maintenance space, well abandonment, selective drilling rigs and hydraulic workover contracts.”
Based on Petronas’ Activity Outlook report, it is observed that across the O&G services value chain, both upstream and downstream activities are expected to rebound strongly in 2019 and be sustained over the next two years.
“For example, demand for drilling rigs and hydraulic work units (HWU) are guided to double between 16 to 18 rigs and five or six HWUs, which will result in a higher number of marine vessels needed,” AffinHwang Capital said.
“With the Pengerang Integrated Complex about 97 per cent completed as at end December, Petronas guided that it will be increasing its local upstream capex from RM12 billion in 2018 to RM14 billion to RM15 billion in 2019.”
The sector has been cast under a long shadow, the research firm said, with the continuous earnings disappointments and downward revisions of capex over the past few years due to the oil-price downturn.
However, the sector is at an inflection point where global oil majors within its sample size are projected to increase capex spending by an average of six per cent in the research firm’s view.
“We also evaluate the sector health by assessing the companies’ ability to continue as a going concern,” it added.
“Having said that, we screened through the companies’ operating cash flows over the past four quarters, together with their latest cash positions, to assess if this would be sufficient to cover the next 12 months of borrowings falling due.
“Among the big caps, Bumi Armada Bhd’s gearing has deteriorated significantly post its RM2 billion impairment exercise with regard to FPSO Kraken.
“This has resulted in a breach in its debt covenant which led to RM3 billion of debts being reclassed to short term.
“It was reported that Bumi Armada is close to securing a US$500 million (RM2 billion) loan, which will be utilised to refinance debt falling due in May 2019 and working capital use.
“The situation has improved in the recently concluded 4Q; 63 per cent of the companies highlighted above reported one of their highest operating cash flows over the past three years, with 47 per cent of them reporting an excess in cash after settling their short-term debt.”
However, a few names have popped out on our radar with relatively high short-term shortfalls including Icon Offshore Bhd, PN17’s Perisai Petroleum Teknologi Bhd and Sarawakian Perdana Petroleum Bhd.
“For exposure, we continue to favour the petrochemical space such as Petronas Chemicals Group Bhd (Petronas Chemicals) and maintenance players such as Sarakian Serba Dinamik Holdings Bhd (Serba Dinamik).
“Both have visible catalysts with the PIC project expected to increase current capacity by 14 per cent for Petronas Chemicals, while the record high orderbook at RM8.3 billion will continue to drive Serba Dinamik’s earnings growth in 2019.
“We also like Velesto Energy Bhd on a 12-month basis, although investors may want to consider taking profits ahead of expected lacklustre 1Q19E results, but nevertheless we are still optimistic on its outlook with jack-up rig demand expected to double in 2019.
“The HuCC/MCM players are also a preferred exposure in the O&G space this year on the back of recovering work visibility – with potential beneficiaries including Carimin Petroleum Bhd, Dayang Enterprise Holdings Bhd, and Petra Energy Bhd.
“Based on our ground checks, offshore support vessels (OSVs) are seeing a slight recovery in charter rates; however, we also noted that more OSVs are slowly being rolled out after being previously cold stacked.”
One of the other reasons behind this is also due to the new industry norm whereby some contracts are announced without a firm contract value, and the actual value depends wholly on the work orders to be given out over the period. AffinHwang Capital