Analysts still neutral on O&G sector but downstream segment improving
KUALA LUMPUR: Analysts are neutral on the outlook of the oil and gas (O&G) sector but they observed that the downstream segment is improving.
In a report, the research arm of AmInvestment Bank Bhd (AmInvestment Bank) said it maintained a ‘neutral’ stance as persistent low asset utilisation levels could still lead to negative cash outflows in the first half of 2017 (1H2017).
“For Malaysian operators, which operate wholly offshore, oil majors’ lower offshore capital expenditure (capex) expectations mean that those struggling with high gearing such as SapuraKencana Petroleum Bhd (SapuraKencana), Bumi Armada Bhd (Bumi Armada), Alam Maritim Resources Bhd (Alam Maritim), and UMW Oil & Gas Corporation Bhd (UMWOG) will still face stiff headwinds,” it said.
Nevertheless, it pointed out that the O&G’s downstream segment is “looking good”.
“Saudi Aramco’s US$7 billion investment for a 50 per cent stake in the refinery and cracker project in the Pengerang Integrated Complex (PIC) in Johor has reignited interest in the larger oil and gas hub called Refinery and Petrochemical Integrated Development (RAPID), which is projected to cost US$27 billion and has currently reached a completion stage of 60 per cent as planned,” it said, noting that Petronas Gas’ 65 per cent-owned LNG regasification plant is expected to be operational by the end of this year while Petronas Chemicals’ US$3.6 billion polyethylene, polypropylene and global projects are expected to progressively commence in 2019.
It added, selective local players are positioned to benefit from job flows from RAPID. These companies include Dialog Group Bhd (Dialog), which is strategically located at the entrance of the massive project, and Malaysia Marine and Heavy Engineering Holdings Bhd’s (MMHE) nearby fabrication yard in Pasir Gudang.
It noted, other players hoping to secure some outsourced contract works may be Barakah Offshore Petroleum and Muhibbah Engineering.
“But overall capex spending still in downtrend.
The Malaysian upstream capex trajectory still faces headwinds as Petronas’ first nine months of the financial year 2016 (9MFY16) spending fell 28 per cent to RM36 billion with the group’s CORAL (Cost Reduction Alliance) 2.0 programme managing to rake in cost savings of up to RM2 billion to date.
“This is prominently underscored by a sharp 90 per cent year-on-year (y-o-y) plunge in new fourth quarter of 2016 (4Q16) orders to RM112 million, awarded to Malaysian operators, compared with RM5.3 billion in 3Q16,” AmInvestment Bank said.
As for capex growth for O&G companies worldwide, the research team noted that according to Barclays’ latest global spending survey of over 200 companies, global O&G capex for 2017, earlier estimated to grow by five per cent, is now expected to rise higher by seven per cent driven by onshore spending.
Offshore spending, on the other hand, is expected to fall 20 to 25 per cent in 2017, after falling 34 per cent in 2016.
“Contracted floating rigs are expected to fall to 120 from 133 currently. Over 59 per cent of Barclays’ respondents now view less than 25 per cent of cost reductions are structural, compared with 45 per cent of respondents surveyed in September 2015,” the research team added.
As for the movements in oil prices, AmInvestment Bank believed that there would not be any changes in oil prices.