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Better prospects for O&G sector seen on rising asset utilisation

Oil and gas sector Maintain overweight: Excluding impairments of RM2.6 billion mostly on gas assets, Petroliam Nasional Bhd’s (Petronas) third quarter of financial year 2019 (3QFY19) net profit dropped 33% quarter-on-quarter (q-o-q) to RM8.4 billion due to lower crude oil prices as Brent decreased by 10% to US$62 (RM259) per barrel, crude production slipping by 11% to 2.1 million barrels on higher decommissioning activities, a 10% increase in operating costs and 15% increase in finance costs. This was partly offset by a 1.3% depreciation of the ringgit against the US dollar and a six-percentage-point reduction in effective tax rate to 18%.

The upstream segment, which now accounts for 15% of group revenue but 46% of its profit after tax (PAT) for nine months of FY19 (9MFY19), was largely impacted by the 10% year-on-year (y-o-y) decrease in average crude oil prices to US$65 per barrel which resulted in its PAT sliding by 12% y-o-y to RM17 billion. This was partly offset by higher average sales of gas volume rising by 114 million standard cubic feet per day (mmscfd) due to higher demand while gas produced rose 5% to 1.4 million boe (the million barrel of oil equivalent). Hence, Petronas’ 9MFY19 core net profit slid by only 4% y-o-y to RM33 billion.

Petronas’ 3QFY19 capital expenditure (capex) rebounded by 78% q-o-q and 59% y-o-y to RM13 billion largely from upstream projects against the backdrop of dwindling tail-end development of the US$27 billion Pengerang Integrated Complex in Johor, which has reached a completion stage of 99.8%. However, international spending has accelerated at a faster pace, which led to the proportion of overseas projects rising to 54% in 3QFY19 from 44% in 3QFY18.

Nevertheless, 3QFY19 domestic spending still increased by 39% q-o-q and 29% y-o-y to RM6 billion, which supports our view of a gradually rising capex trend. This is underpinned by Petronas’ 2019–2021 Activity Outlook, which projects a gradual improvement in the utilisation of rigs, vessels, pipeline/offshore installations next year. Given that 9M19 capex has risen by 9% y-o-y to RM29 billion, we expect a continuation of the upward momentum next year.

Malaysia’s 9MFY19 contract awards rose 14% y-o-y to RM9.2 billion following a lull in 1QFY19 and driven by multiple awards to Sapura Energy Bhd and Malaysia Marine and Heavy Engineering Holdings Bhd (MMHE) securing a RM2.5 billion Kaswari central processing platform job while Bumi Armada Bhd secured a 30% stake in ONGC’s KG-DWN 98/2 floating production storage and offloading charter. While 3QFY19 job orders rose 76% y-o-y to RM3.4 billion, these were down 15% q-o-q.

Over the longer term, 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. Westwood Global Energy Group is projecting global drilling and well services expenditure to grow 19% to US$1.9 trillion for 2019–2023 from 2014–2018.

Following the surprise disruption to Saudi Arabia’s production from drone attacks Brent crude oil prices have remained above US$60 per barrel with the year-to-date 2019 average at US$64 per barrel.

However, with US crude inventories increased by 8% to 450 million barrels since mid-September, we have lowered our 2019–2020 price forecasts to US$60-US$65 per barrel from US$65–US$70 per barrel. We maintain “overweight” on the sector as prospects have radically brightened with rising asset utilisation globally which supported service providers’ improving results. — AmInvestment Bank, Nov 27

Source: TheEdgeMarkets