Cost rationalisation in O&G needed to improve efficiency

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KUCHING: Significant cost rationalisation in the Malaysian oil and gas sector is expected by analysts to improve operating efficiency.

According to the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research), most, if not all, global oil and gas producers including Petroliam Nasional Bhd (Petronas) have reiterated that there will be significant cost rationalisation in 2015 and beyond.

“Petronas was quoted in the media indicating that it will be reducing capital expenditures by -10 per cent and operating expenditures by approximately -25 per cent to -30 per cent,” MIDF Research said.

The research arm noted that the effects are already felt in the industry, and in the equity markets, as selected oil and gas service providers were asked to relook and to renegotiate existing contracts.

Its channel checks indicated that some offshore support vessel (OSV) operators were asked to readjust downwards charter rates for existing and new contracts, whereas some operators experienced vessel cancellations in favour of maximising the utilisation of fewer vessels.

“The positive side of cost rationalisation within the industry is with regard to operating efficiency.

“During times of subdued oil prices, operators and service providers can expect fewer job orders but at more competitive rates,” it said.

As such, MIDF Research noted that companies would need to review its own operating costs (reduce staffing costs and material costs) in order to submit competitive bids without compromising on its own profit
margin.

“This view is corroborated by local OSV operators,” it said.

In addition, the research arm noted that during times of comparatively low vessel charter rates, certain OSV operators would prefer spot charters (short term) as opposed to long-term charters as they are not willing to risk locking in a vessel at a low rate for a prolonged
period.

At this point in time, MIDF Research has only one OSV operator under its coverage, i.e.

Perdana Petroleum Bhd (Perdana Petroleum).

Despite still remaining positive on the overall oil and gas sector, the research arm is cautious on Perdana Petroleum as it has downgraded the stock to ‘neutral’ in its financial year 2014 (FY14) Results Review report dated February 24, 2015.

“We are aware that as the production sharing contract (PSC) operators are embarking on the cost rationalisation drive, charter rates will face downward pressure and the charter of vessels will be at risk,” it
said.

MIDF Research added that there could also be knock-on effects from the other sub-segments of the industry onto the OSV industry.
For example, the research arm said that in an event that hook-up and commissioning (HUC) contractors such as Dayang Enterprise Holdings Bhd (Dayang) were to experience rescheduling in job orders, the knock-on effect could be felt on Perdana Petroleum as Dayang charters the vessels for its HUC activities from Perdana Petroleum.

On crude oil price to date, MIDF Research noted that the Brent crude oil price is on a slight upward trajectory in 2015 after experiencing a steep slump towards end 2014.

Year-to-date, it said that Brent crude price has appreciated by approximately +6.3 per cent to levels surpassing US$60 per barrel (pb).

“Going forward, we are of the view that Brent crude price will trade range-bound between US$60-70pb in 2015,” it said.

As such, the research arm continues to be optimistic that prices will stay lifted based on average global oil demand growth of 1.03 million barrels per day (mbpd) for 2015 and 1.01mbpd for 2016.

On average, the oil and gas stocks under MIDF Research’s coverage have appreciated by +3.4 per cent year-to-date, in-line with the appreciation in Brent crude price.

Stocks under the research arm’s ‘buy’ recommendation however, have appreciated by +15.7 per cent year to date (YTD), far outpacing the broader market FBMKLCI gain of only +2.7 per cent YTD.

Overall, MIDF Research reiterated its ‘positive’ stance on the oil and gas sector, pinning its optimism on supported global crude oil prices, sustained local oil output and sustained activity levels to support oil output levels.

Despite the lacklustre sentiments reverberating throughout the sector, it noted that contracts continue to flow from Petronas.

For instance in the first quarter of 2015 (1Q15), the research arm said that Petronas awarded Alam Maritim Resources Bhd and Icon Offshore Bhd with OSV umbrella contracts.

It added that engineering and maintenance works were also awarded to Barakah Offshore Petroleum Bhd by Petronas in 1Q15.

“In addition to the award of contracts, activity levels remain robust in Malaysian waters as can be seen from the huge increase in national crude oil production,” it said.

It further noted that for the first nine months of 2014 (9M14), the average production rate was approximately 580 thousand bpd (kbpd) but in 4Q14, the production rate was boosted by more than +15 per cent exceeding 670kbpd.