Brightening prospects for O&G from global rise in asset utilisation

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This is underpinned by Petronas’s 2019–2021 Activity Outlook, which projects a gradual improvement in the utilisation of rigs, vessels, pipeline/offshore installations next year. — Bernama photo

KUCHING: The oil and gas (O&G) sector prospects have been viewed as brightening from the increase in asset utilisation globally.

In a report, the research team at AmInvestment Bank Bhd (AmInvestment) reiterated its overweight call on the sector, pointing out that the sector as prospects have radically brightened with rising asset utilisation globally which supported service providers’ improving results.

In the third quarter of 2019 (3Q19), it noted that 3Q19 domestic O&G spending still increased by 39 per cent quarter-on-quarter (q-o-q) and 29 per cent year-on-year (y-o-y) to RM6 billion, which supports its view of a gradually rising capex trend.

This is underpinned by Petroliam Nasional Bhd’s (Petronas) 2019–2021 Activity Outlook, which projects a gradual improvement in the utilisation of rigs, vessels, pipeline/offshore installations next year.

“Given that the first nine months of 2019 (9M19) capital expenditure (capex) has risen by nine per cent y-o-y to RM29 billion, we expect a continuation of the upward momentum next year,” AmInvestment commented.

It also pointed out that Malaysia’s 9M19 contract awards rose 14 per cent y-o-y to RM9.2 billion following a lull in 1Q19 and driven by multiple awards to Sapura Energy and Malaysia Marine & Heavy Engineering Holdings (MMHS) securing a RM2.5 billion Kaswari central processing platform job while Bumi Armada secured a 30 per cent stake in ONGC’s KG-DWN 98/2 FPSO charter.

“While 3Q19 job orders rose 76 per cent y-o-y to RM3.4bil, these were down 15 per cent q-o-q,” it added.

Meanwhile, the research team noted that Petronas’ 3Q19 core earnings fell 33 per cent q-o-q to RM8.4 billion due to lower crude oil prices as Brent decreased by 10 per cent to US$62 per barrel, crude production slipping by 11 per cent to 2.1 million barrels on higher decommissioning activities, a 10 per cent increase in operating costs and 15 per cent increase in finance cost.

This was partly offset by a 1.3 per cent depreciation in the ringgit versus dollar and a six-percentage point reduction in effective tax rate to 18 per cent.

Despite the decline in core earnings, AmInvestment pointed out that Petronas’ 9M19 core was down by only four per cent y-o-y.

“The upstream segment, which now accounts for 15 per cent of group revenue but 46 per cent of its profit after tax (PAT) for 9M19, was largely impacted by the 10 per cent y-o-y decrease in average crude oil prices to US$65 per barrel which resulted in its PAT sliding by 12 per cent y-o-y to RM17 billion.

“This was partly offset by higher average sales gas volume rising by 114mmscfd due to higher demand while gas produced rose five per cent to 1.4 million boe. Hence, Petronas’ 9M19 core net profit slid by only four per cent y-o-y to RM33 billion,” AmInvestment explained.

Over the longer term, it believed that offshore projects in Brazil, Mexico, the Middle East and West Africa are poised to gain traction with Sapura Energy and MMHE being selected for Saudi Aramco’s Long Term Agreement programme, which allows them to bid for the kingdom’s massive offshore projects that could reach US$150 billion over the next 10 years.

It noted that Westwood Global Energy Group is projecting global drilling and well services expenditure to grow 19 per cent to US$1.9 trillion for 2019 to 2023 from 2014 to 2018.

All in, AmInvestment said it is lowering its 2019 to 2020 crude oil forecast to US$60 to US$65 per barrel from US$65 to US$70 per barrel amid high volatility.

“Following the surprise disruption to Saudi Arabia’s production from drone attacks purportedly launched by Iran-backed Yemeni Houthis in September this year, Brent crude oil prices have remained above US$60 per barrel with the YTD 2019 average at US$64 per barrel.

“However, with US crude inventories rising by eight per cent to 450mil barrels since mid-September, we have lowered our 2019 to 2020 price forecast to US$60 to US$65 per barrel from US$65 to US$70 per barrel.

“Since the beginning of 2019, the EIA’s 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 settling at US$64 per barrel for 2019 and US$60 per barrel for 2020,” it explained.