O&G sector en route to recovery
KUCHING: The oil and gas (O& G) sector is in the midst of recovery and general activities in the sector could pick up in 2018 due to an anticipated improvement in oil prices, analysts observed.
In a report, the research arm of Hong Leong Investment Bank Bhd ( HLIB Research) said, “Earnings of companies under coverage may have bottomed in 2017 and general activities could pick up in 2018 due to anticipated improvement in oil prices.”
However, it does not anticipate the improvement is sufficient to justify for a meaningful turnaround in the industry as growth in demand is only expected to partially address the ongoing oversupply of contractors and assets.
“We are still of a view that it is too early to upgrade the sector, given the potential implementation of exit strategy for oil production cut, significant increase in oil production from US producers and excessive supply in the market would still require more time to be absorbed by the market,” it opined.
For 2018, HLIB Research believed that several factors would affect oil prices during the year.
These factors include the participation of Libya and Nigeria in capping their combined output at 2017 levels ( below 2.8mn bpd), healthy oil demand growth driven by global economy growth, a possible exit from the production cut plan, and US rapid ramp up in oil production.
It believed that this year could see global oil demand expanding again by 1.51 million barrels per day and non- OPEC supply rising by 990,000 barrels per day.
“The gap is likely to be filled by OPEC production which is expected to stand at 33.2m bbl per day, representing a growth of 0.7m bbl/day from 2017 level, resulting in a balanced market.
“However, we expect rising geopolitical tension may cause sudden supply shortages which could dis- rupt the balanced market. Hence, we raised our oil price target range to US$ 55 to US$ 65 per bbl for 2018,” HLIB Research said.
Meanwhile, it highlighted that one of the few bright spot in the latest Petronas activity outlook report is Maintenance, Construction & Modification ( MCM) activities which is expected to remain stable over the next few years due to increasing number of projects and ageing facilities.
“According to the report, MCM activity is expected to remain stable over the next three years, which is similar to peak activity level in 2013 to 2014 to support operational requirements.
“Moreover, medium term outlook is expected to remain steady due to increasing number of projects and ageing facilities. This is positive for major MCM players like Dayang Enterprise Holdings Bhd ( Dayang), Petra Energy Bhd (Petra Energy) and Sapura Energy Bhd (Sapura Energy),” it added.
As for the liquified natural gas ( LNG) and petroleum tanker segments, the research team said both markets could remain subdued in the near term.
“LNG charter rates are still at low since 2011 and we do not foresee the rates to improve significantly due to significant supply overhang.
“Charter rates for petroleum tanker remain depressed but we opined the worst is over due to slower fleet growth and increasing oil demand going forward,” it explained.
Overall, HLIB Research retained a ‘neutral’ view on the sector despite the possible improvement in earnings for companies in the O& G sector. It noted, “While O& G companies’ earnings under coverage are believed to have bottomed in 2017, earnings recovery overall in 2018 is still not sufficient to justify a rerating on the sector as a whole.
“We elect to wait clearer signs of recovery to warrant a more drastic upgrade in sector.”