Slow and gradual recovery for O&G industry

Low activity likely to affect earnings of local players

“We still advise against purely investing in stocks that are dependent on Petronas’ local contracts.” UOB Kay Hian Research

PETALING JAYA: Local oil and gas (O&G) service providers’ earnings could be impacted from the low activity level in the industry as Petroliam Nasional Bhd (Petronas) tightens its spending and delays some of its projects, according to analysts.

This was despite the recent improvements in the global crude oil prices driven by the potential coronavirus (Covid-19) vaccine.

Kenanga Research said Petronas continued commitment of higher dividends could hamper recovery of the sector locally, especially at a time when other oil majors are cutting dividends globally.

“Overall, given the combination of Petronas’ mildly deteriorating balance sheet, earnings, and increased dividend commitment, we strongly believe Petronas will be increasingly prudent in spending moving forward,” it said in a report yesterday.

The research house maintained “neutral” on the O&G sector and it expected that the recovery in the O&G industry would be slow and gradual as fundamentals remain weak.

It expected that the local O&G industry activity would return to 2019-level at least until 2023.

“We advocate a trading approach to the sector in contrast to a fundamentally-based investment strategy, taking advantage of short-term gains amid recent vaccine development news flow to boost market sentiment,” Kenanga said.

Meanwhile, UOB Kay Hian Research pointed out that the third quarter capital expenditure of Rm7.9bil by Petronas was mainly for its overseas project.

For the first nine-month of 2020, it said Petronas has disbursed Rm22.5bil capex representing a 22% decline compared to last year, which is in line with the national oil company’s capex cut for this year.

“We still advise against purely investing in stocks that are dependent on Petronas’ local contracts given the notorious historical earnings misses,” UOB said.

It pointed out that Petronas would continue to face multiple challenges not only from low oil prices, but also financial pressures due to higher dividends of Rm34bil for 2020, Sabah and Sarawak’s revenue claim and further delay in project startups.

“Hence contract deferrals continue to be a recurring theme,” it said.

Kenanga Research raised a concern on Petronas’s net cash position that has shrunk 25% since end-2019 to Rm61bil.

“This is slightly alarming, especially considering that earlier this month it was announced that Petronas is set to pay an additional Rm10bil special dividend to the federal government, on top the ordinary dividends of Rm24bil, in efforts to combat the challenges caused by the Covid-19 pandemic,” it said.

Last Friday, Petronas posted a net loss of Rm3.4bil for the third quarter ended Sept 30 compared with a net profit of Rm7.4bil in the same quarter last year, due to impairments and lower average crude oil prices.

The group recorded a revenue of Rm41.1bil for the quarter, 25% lower from the Rm55.1bil recorded a year earlier.

The international benchmark Brent crude oil price last week went to its highest level since March at US$48.80 per barrel. Brent oil fell slightly to US$47.31 per barrel yesterday.