An unexciting 1H ahead for Malaysia’s O&G sector
KUCHING: It will likely be an unexciting first half of the year (1H) for Malaysia’s oil and gas (O&G) sector.
However, analysts at the research arm of Kenanga investment Bank Bhd (Kenanga Research) believed that the sector could also see a gradual quarter-on-quarter (q-o-q) improvement, in tandem with the pick up in activities in the O&G sector.
It highlighted that looking at the global scene, oil majors are maintaining the capital expenditure (capex) budget and oil investment returning in a big wave has yet to be seen.
Therefore, the research arm believed capex and operating expenditure (opex) allocations will remain rather selective.
According to Kenanga Research, domestically, Petroliam Nasional Bhd (Petronas) is looking to commit capex of circa RM60 billion this year with Brent crude oil prices pegged at an average of US$45 per bbl.
In the the first quarter of 2017 ( 1Q17), the research arm saw better contracts flows returning, despite most contract value are undisclosed.
“Based on our channel checks, tenders and enquiries are picking up, suggesting that the worst could be over,” it said.
However, earnings are likely to be unexciting, at least for the first half of the year, but Kenanga Research expected gradual q-o-q improvement in tandem with pick up in activities.
Following the announcement of Pan Malaysia transport and installation ( T& I) contract to SapuraKencana Petroleum Bhd (SapuraKencana) and inspection, maintenance and repair (IMR) contract to Alam Maritim Resources Bhd (Alam), the research arm is expecting more contracts such as maintenance, construction and modification job to roll out in the next few months.
It noted that potential beneficiaries are Dayang Enterprise Holdings Bhd, Petra Energy Bhd and Barakah Offshore Petroleum Bhd.
On oil prices, Kenanga Research observed that they have weakened circa 10 per cent after a few months of stabilisation largely due to reignited concerns on swelling oil stocks and revival of rigs count in US coupled with moderation of oil demand growth.
“This is not surprising to us; as highlighted in our previous reports, there was a reversal of US oil rig count downtrend to 631 (+100 per cent) from a bottom of 316 end of May last year.
“Additionally, US crude oil production has also climbed back to 9.1 million bbl per day level, the highest since February last year, capping oil prices recovery path,” the research arm said.
Nevertheless, Kenanga Research was still expecting consistent compliance from the Organization of the Petroleum Exporting Countries (OPEC) members and higher compliance from Russia from current level till end of June.
Additionally, the research arm reckoned that the market is building in expectations for an extension after the six-month period which will be decided in the next OPEC meeting in May.
All in, the research arm retained its in-house Brent oil forecast of US$55 per bbl in 2017.
While Kenanga Research believed the sector has yet to enter into an up-cycle in view of sluggish capex growth, the research arm reckoned the current oil volatility will provide tactical trading opportunities on selective counters premising on oil prices will recover to an average US$55 per bbl level backed by the case of OPEC members and non-OPEC nations continuing to trim production in 2H17, which would lift oil prices to as high as US$60 per bbl as well as better contract flow.
SapuraKencana, in the research arm’s view, remained the best proxy to trade the volatility in oil prices and ride on the gradual recovery of the sector.
Yinson Holdings Bhd (Yinson), on the other hand, was the research arm’s top pick for non-Shariah compliant investors looking for earnings resiliency within the upstream space.