Oil and Gas
This year has been projected to be a stabilising one for the oil and gas sector as analysts believe “the stabilisation of crude oil prices will entice oil majors to increase their activities”.
The research arm of Kenanga Investment Bank Bhd (Kenanga Research) pointed out in a sector update that following the Organization of the Petroleum Exporting Countries (OPEC) and nonOPEC members’ deal to cut production effective January 2017, crude oil prices have enjoyed a good rally, rising by 9.1 per cent to the US$55 per barrel (bbl) level in December last year.
However, Kenanga Research continued to stay cautiously optimistic as any execution glitch in the production rationalisation will lead to a correction of crude oil prices.
“Additionally, we reckon the crude oil price volatility will persist on continuous oil inventories build-up and rebound in rigs count,” it said.
Nevertheless, the research arm raised its forecast 2017 average Brent crude price to US$55 oer bbl from US$51 per bbl.
Meanwhile, PublicInvest Research noted that the oil price direction going forward is hinging on US President Donald Trump’s energy policies pledged to “an America first energy plan” vision.
“Trump aims to make America energy independent as a strategic economic and foreign policy goal of the US, which could come under the expense of the rest of the world.
“One of his visions include unleashing US’ US$50 trillion worth of untapped shale, oil and natural gas reserves which only imply further pressure on current oil prices,” the research arm said.
On crude prices recovery, Kenanga Research noted that the direct beneficiaries will definitely be pure-play exploration and production companies and integrated companies with oil production profile.
With only RM1.6 billion worth of contract award being announced in fourth quarter of 2016 (4Q16), this sums up the total upstream contract award announced in 2016 to RM9.7 billion, which accounted for only slightly more than half of what was announced in 2015 and one-third of total contract awards value in 2014.
“We believe the stabilisation of crude prices will entice oil majors to increase their activities and in our view, opexrelated jobs in shallow waters will be prioritised to reap the low hanging fruits,” it said.
As such, the research arm anticipated better contracts flow from the oil majors in 1H17, including the estimated RM5 billion maintenance, construction and modification (MCM) and circa RM1 billion Pan Malaysia transport and installation (T&I) contract.
Nevertheless, the sector’s earnings disappointment risk remains apparent in 1H17 as higher news flow might not translate into immediate substantial earnings recovery.
“After several consecutive quarters of earnings cut, our two-year average forward earnings forecasts are 11 to 10 per cent below consensus.
“Both our in-house/consensus numbers are still projecting earnings rebound with the expectations of pick-up in offshore activities.
“If work orders start to revive in 2017, we should see better earnings prospect from 2018 onwards,” it said.