O&G sector’s prospects brightening, focus likely on upstream
KUALA LUMPUR: Malaysia’s oil and gas (O&G) sector’s prospects have been viewed as brightening and analysts believe that Petroliam Nasional Bhd’s (Petronas) investments will likely continue to be focused on the upstream segment.
Petronas group posted a profit a er tax, amortisation, and minority interest (PATAMI) of RM12.7 billion in the second quarter of 2019 (2Q19), arrived a er stripping-off net impairment write-backs,
jumping 11 per cent year-onyear (y-o-Y), primarily helped by the weakening ringgit and lower effective tax rates, offset by higher product costs and lower average prices.
For the first half of 2019 (1H19), Petronas incurred total capex of RM15.7 billion, mainly for the upstream sector (43 per cent), with most of the total capex (61 per cent) being incurred for local projects. Petronas guided that its full-year capex projection of RM50 billion remained intact, with investments being backloaded towards the 2H of the year.
“Of the approximately RM35 billion capex expected for the remaining of the year, we expect a 50-50 split between local and international investments, with focus to remain on the upstream segment,” said the research team at Kenanga Investment Bank Bhd (Kenanga Research).
It also noted that Petronas paid out RM22 billion of the RM30 billion special dividends declared for 2019, whilst RM4 billion of the RM24 billion ordinary dividends in relation to FY18 have also been paid thus far.
“Moving forward, given Petronas’ net-cash pile of RM92.6 billion, the remaining dividends of RM28 billion (RM8 billion special, and RM20 billion ordinary) should be promptly paid out within the year.
“Thus far, the company has yet to announce dividends for FY19, and as such, we believe dividend payments could be lower for 2020 – normalised from a high of RM54 billion in 2019 (RM30 billion special, and RM24 billion ordinary),” it added.
“Given Petronas’ capex expected to increase in the 2H of the year, with continued focus towards the
upstream segment, we believe potential value-chains that could emerge as beneficiaries would include the drillers, fabricators, as well as FPSO players which could benefit from sanctioning of greenfield investments.
“Nonetheless, we believe cost optimisation will still be highly relevant for Petronas, and hence, we continue to expect intensified bidding competition and lower margins for upcoming job awards,” it opined.
On another note, the research team at AmInvestment Bank Bhd (AmInvestment) said, amid the recent disruption to Saudi Arabia’s production from drone a acks purportedly launched by Iran-backed Yemeni Houthis, Brent crude oil prices have rebounded by US$4 per barrel from last week to US$65 per barrel, which is the year to date 2019 average.
“With US crude inventories declining by 14 per cent to 417 million barrels since the oneyear peak of 485 million in June this year, we retain our 2019 to 2020 price forecast at US$65 to US$70 per barrel which has been maintained since3 December 3 last year.
“Since the beginning of 2019, the EIA Short-Term Energy Outlook has continuously revised its crude oil projections, moving its Brent oil projection between US$60 per barrel and US$70 per barrel
and currently se ling at US$63 per barrel for 2019 and US$62 per barrel for 2020,” it explained.
All in, AmInvestment maintained its ‘overweight’ rating on the sector as prospects have begun to brighten with rising asset utilisation globally which supported service providers’ improving results.
Kenanga Research maintained its ‘neutral’ stance on the sector as it believed that while the O&G sector may have already begun its bo oming out process given the increased activities and contract flows
especially within the upstream space, full recovery could still be long and gradual for many players given their balance sheet constrains.
“As such, we advocate more selective approach towards stock picks within the sector, favouring names with earnings delivery and resilient balance sheets, coupled with acceptably decent valuations,” it suggested.