DIVERSIFY REVENUE BASE, O&G PLAYERS URGED
Low oil price environment to weigh on firms’ earnings, says analyst
OIL and gas (O&G) service providers will need to diversify their revenue base to mitigate oil price shocks, said analysts.
They must also increase operational efficiency to lift margins or venture into alternative energy businesses to reduce dependency on oil.
MIDF Research analyst Noor Athila Mohd Razali said the tumbling oil price could delay the award of new contracts and renewals, which in turn would result in margin compression for O&G service providers.
“The low oil price environment will have an impact on the entire O&G value chain. Upstream producers will be more directly impacted.
“Lower revenue as a result of higher cost of production and lower selling price will weigh on earnings,” she told the New Straits Times.
For downstream players, Athila said feedstock prices would be more favourable following the drop in the oil price.
However, the average selling prices of petroleum derivative products will be soft as well.
“This will lead to thinner spread between the selling price and cost of production.”
Athila said O&G players preferred oil to trade between US$65 and US$75 per barrel, which would enable them to stay in production and drive offshore services activities.
She expects the oil price to normalise in the second half of this year, driven by voluntary production cut by United States shale producers, tapering Covid-19 cases that will gradually restore demand, lifting of travel ban and potential reconciliation between Organisation of the Petroleum Exporting Countries and Russia.
IQI Global chief economist Shan Saeed said companies needed to be resilient by keeping their overhead cost and other charges low.
He said the oil price would remain subdued in the near future.
This may be a good opportunity for industry players to renegotiate their loans with banks as the global economy is heading towards a lower interest rate regime.
“With the oil price depreciating by almost 30 per cent, Saudi Arabia, the US and Russia are going to feel the pressure,” he said, adding that the oil price could be sustained at between US$50 and US$60 per barrel.
With weaker US dollar, he said commodities prices should rise again.
Geopolitical risk was coming back into the market, making oil investors nervous and uncertain, he added.
“Uncertainty kills business and reduces capital expenditure in the energy market. It will go down by between US$750 billion and US$1 trillion in the next six to nine months,” he said.
Saeed said O&G producers needed to be on the same page in terms of price and production outlook, adding that the oil market would do the balancing act at the expense of US oil producers.
JF Apex Securities Bhd research analyst Lee Cherng Wee said upstream players were more affected as the lower oil price would lead to lower revenue.
“The whole industry will be affected as the lower oil price discourages further exploration and investment, meaning fewer jobs and contracts for the players,” he added.