Upbeat outlook seen for downstream oil and gas

Companies expected to benefit from cheaper oil, Petronas capex

PETALING JAYA: While equity analysts remain bearish on the oil and gas (O&G) sector, they are more upbeat about the prospects of downstream companies.

One reason is that the plunge in crude oil prices benefit downstream players as it lowers the cost of their raw materials.

Secondly, while crude oil prices remain at low levels, it has been more stable over the last six to seven months.

This, in turn, could nudge oil majors such as Petroliam Nasional Bhd (Petronas) to embark on new projects. And going by recent statements by Petronas, it is clear the national oil company is focused on completing its Refinery and Petrochemical Integrated Development (Rapid), which is touted to be Asia’s largest downstream hub.

“We expect the downstream sector to continue to grow along with Petronas’ capital expenditure plan,” said an analyst.

At the first-half results briefing by Petronas last month, president and chief executive officer Datuk Wan Zulkiflee Wan Ariffin ( pic) said Petronas is building on its downstream portfolio to “future-proof” the national oil company.

MIDF Research said it is maintaining its “negative stance” on upstream O&G but reiterated its “positive stance on the downstream sector on the back of Petronas’ capex focus.

“We opine that the downstream utility and retail fuel segment will continue to register commendable year-on-year earnings growth, offer above risk-free rate dividend yields and acceptable capital upside,” it said in a report last week.

Nonetheless, it is not all gloom and doom for local upstream companies.

According to an English daily quoting industry sources, Petronas is expected to soon dish out about RM6bil worth of maintenance, construction and modification (MCM) contracts.

These contracts are typically meant for Petronas rigs which extract oil and gas.

Petronas was said to have conducted a pre-award meeting with five to six shortlisted candidates.

“The MCM projects would definitely provide a boost to the local service providers after a lull,” said an executive with a local O&G firm.

Brent crude oil prices have been trading between US$45 and US$55 a barrel since February. Prices had been more volatile earlier.

The price of crude oil has tumbled since September 2014 due to a global oversupply, dropping from US$100 a barrel to below US$40. “The environment in the O&G industry is seeing some stability in the sense of the movement in crude oil prices,” said an O&G executive.

He added that some oil majors were starting to “recalibrate” their capex and that this was an indication of more projects to come on stream.

A contrarian view, though, has been expressed by MIDF Research which said that sustained global crude oil prices will not necessarily translate into higher capex spend. “This notion of strong and stable crude oil prices not translating into higher value offshore projects is corroborated by the expected capex plan by oil majors,” it said. It added that the total capex by global oil majors in the exploration and production sector in 2018 is expected to decline year-on-year by 2.2%.