Clearer skies for O&G with better prices, contract flow
KUCHING: Signs of improvement are appearing in the oil and gas (O&G) segment with Brent crude oil prices stabilising, investments in the upstream sector expected to recover as well as an improvement in local contract flows.
Notably, Brent crude oil prices have been trading within the US$55 to US$70 per barrel range throughout most of 2019, barring some occasional up and down spikes.
In recent weeks, drone strikes in Saudi Aramco’s refineries affected about 5.7 million barrels per day, which makes up roughly half of the country’s oil output, igniting a sharp albeit temporary surge in Brent crude prices to as high as US$69 per barrel midlast month.
“However, the quicker-than-expected restoration of production, on top of maintaining export volumes using spare inventories and production capacity quickly put a firm halt on the surge,” said analysts with Kenanga Investment Bank Bhd ( Kenanga Research) in a sector recap.
“That said, OPEC and Russia’s continued compliance towards self-imposed production cuts have helped eased supply- side worries, with the US- China trade war tensions causing greater demandside concerns.
“Overall, we maintain our projected 2019-2020 average Brent price assumptions at USD65 per barrel. We believe this price range to be relatively comfortable for oil majors to commit to higher investments.”
Kenanga Research also expected to see greater investments in the upstream space for the coming years on the back of gradually steadying oil prices.
“Locally, despite already committed to higher dividend pay- outs in 2019, Petronas has maintained its higher capex spending guidance, with increased focus on upstream,” it added.
“Globally, we have also witnessed increased flow of engineering/construction jobs from the Middle- east while floater demand has jumped rapidly from South America.
“Meanwhile, local players have also started to see uptick of contracts flow in the past four or five quarters. As expected, the newer jobs came mostly from the upstream space, such as floaters, fabrication, maintenance and drilling.
“While this can be seen as a clear sign of a bottoming- out, we note that the recovery process could be long and gradual, with many of the local players still plagued with earnings uncertainties and balance sheet constraints, all while cost optimisation still remains a key theme for new job tendering.”
Another interesting point of note is a growing disparity in valuations between O&G sector gainers and losers, as Kenanga Research saw that the Bursa Malaysia Energy Index managed year-to- date gains of 34 per cent, far outperforming FBM KLCI at minus six per cent returns.
“The biggest contributors of weighted gains were from Yinson Holdings Bhd, Dialog Group Bhd and Serba Dinamik Holdings Bhd, with little surprise there, given their resilient record of superb growth and earnings delivery.
“As such, we are witnessing a disparity in valuations being formed between outstanding companies within the sector, as compared to the majority of lacklustre oil and gas names.
“In fact, barring a few names, most of the counters within our coverage are currently trading at discounted valuations or more below its mean valuations, and as such, some of our outperform calls were selected given that the turnaround stories could not justify the discounted valuations.
“Despite a slightly more optimistic tone, we continue to remain neutral towards the sector, given limited upside to Petronas-linked counters with the exception of MISC Bhd. “
However, the quicker-than-expected restoration of production, on top of maintaining export volumes using spare inventories and production capacity quickly put a firm halt on the surge. Kenanga Research