Mixed out­look on lo­cal O&G in­dus­try

Re­cov­ery in prices stalled on resur­gence of Covid-19

The Star Malaysia - StarBiz - - Front Page - By INTAN FARHANA ZAINUL in­tan­zainul@thes­tar.com.my

PETALING JAYA: A fresh wave of coro­n­avirus (Covid-19) cases could see pro­longed low crude oil prices as de­mand for fuel is plung­ing due to longer move­ment re­stric­tion glob­ally.

Brent crude oil slid 68 cents to US$43.47 a bar­rel yes­ter­day, while the US crude oil West Texas In­ter­me­di­ate (WTI) fell 65 cents to US$40.36 af­ter two weeks of rally.

Crude oil prices have been on a three­month rally on im­proved sen­ti­ment but oil prices have been stuck near US$40 per bar­rel as the re­cov­ery in prices have been stalled on con­cerns that Saudi Ara­bia may cut its sell­ing prices and the resur­gence of Covid-19 in­fec­tions cast doubt about sus­tained re­cov­ery in oil con­sump­tion.

An­a­lysts are mostly mixed on their out­look of the lo­cal oil and gas (O&G) in­dus­try, es­pe­cially with bet­ter-than-ex­pected data on man­u­fac­tur­ing ac­tiv­ity in China, Europe and the US show­ing fac­to­ries’ out­put re­cov­er­ing.

Rakuten vice-pres­i­dent of eq­uity re­search Vin­cent Lau said crude oil prices could surge above US$50 per bar­rel by the year-end as eco­nomic ac­tiv­ity picked up and as de­mand im­proved due to win­ter sea­son.

“The re­cov­ery in crude oil prices could take a slightly longer time to re­cover due to the fresh wave of Covid-19 cases.

“But en­cour­ag­ing man­u­fac­tur­ing num­bers from China and the US as well as im­prov­ing economies are sup­port­ing the de­mand for oil in the near term,” he told Star­biz.

At the same time, sev­eral coun­tries such as Spain and Ger­many have started to tighten up their move­ment re­stric­tion to cool down hotspots due to fear of a sec­ond wave pan­demic.

In ad­di­tion, cities like Bei­jing and Melbourne are tight­en­ing lock­downs to bat­tle new in­fec­tions.

“We re­it­er­ate our cau­tious view on the out­look for the O&G in­dus­try for this year on the re­cent resur­gence of new Covid-19 cases in many coun­tries and a po­ten­tial sec­ond wave,” said MIDF Re­search an­a­lyst Noor Athila Mohd Razali to Star­biz.

She said a slow eco­nomic re­cov­ery, cou­pled with neg­a­tive Covid-19 news, would con­tinue to im­pact the re­cov­ery of crude oil prices.

“If Covid-19 cases re­main el­e­vated, it could also po­ten­tially de­rail the de­mand re­cov­ery for crude and crude-re­lated prod­ucts,” Noor Athila said.

How­ever, de­spite ex­pect­ing de­mand to slug­gishly re­cover and the global oil price to re­main at the cur­rent level, Athila reck­oned that oil ma­jors are un­likely to fur­ther cut their cap­i­tal ex­pen­di­tures (capex) for this year.

“The im­pact will be on new con­tract awards and ex­ten­sions which are ex­pected to be de­layed to 2021. We an­tic­i­pate some mar­gin com­pres­sion for cur­rent work or­ders as oil ma­jors re­main cost sen­si­tive,” she said.

Ear­lier, oil ma­jors such as Exxon Mo­bil, Royal Dutch Shell, Saudi Aramco and Petro­bras had cut their 2020 capex by 20%30%.

Na­tional oil com­pany Petro­liam Na­sional Bhd (Petronas) has slashed its capex for this year by 21% from the ini­tial es­ti­mate of around Rm50­bil as it faces chal­lenges driven by the pan­demic out­break that has led to a sup­ply-de­mand shock.

With the bleak out­look of the O&G sec­tor, Amin­vest­ment Bank said new con­tract awards to Malaysian op­er­a­tors in the first half of the year dropped 62% year-on-year to Rm2.2bil, with the worst fall­out yet to come in the sec­ond half on­wards.

The re­search house ex­pected the earn­ings of up­stream play­ers to be worse than the pre­vi­ous 2015–2017 oil price rout due to con­tin­u­ous low oil prices.

It gave a “sell” call on Bumi Ar­mada, Sa­pura En­ergy and Ve­lesto En­ergy and “buy” rec­om­men­da­tions on Dia­log Group and Serba Di­namik Hold­ings.

With the with­drawal of the court cases be­tween Petronas and Sarawak state, Amin­vest be­lieved Petronas may have to bear up to Rm2.5bil in ad­di­tional tax an­nu­ally from east Malaysia that would vary ac­cord­ing to crude oil and nat­u­ral gas prices.

“This rep­re­sents 6% of Petronas’ fi­nan­cial year 2019 (FY19) core earn­ings and 3% of net cash of Rm88­bil.

“Based on Petronas’ FY19 capex of Rm47.8bil, the ad­di­tional sales tax that could be im­posed by the east Malaysian states trans­late to 7% of FY20 forecast capex of Rm38­bil,” it said.

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