O&G sector still rife with challenges

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The O&G industry will still likely face headwinds ahead as uncertainties of oil prices continue, driven by various global factors.

The O&G industry will still likely face headwinds ahead as uncertainties of oil prices continue, driven by various global factors.

KUCHING: The oil and gas (O&G) industry will still likely face headwinds ahead as uncertainties of oil prices continue, driven by various global events.

The research arm of CIMB Investment Bank Bhd (CIMB Research) in a recent report, pointed out that recently, the industry has been hit by three events that will likely affect oil prices.

“Brent and WTI have both declined to US$37.19 (down 3.3 per cent) and US$35.74 (down 4.3 per cent) respectively overnight on news of surprising weekly build-up in US crude inventories coupled with the Federal Reserve’s 0.25 per cent rate hike announcement earlier this morning.

“This was further exacerbated by the proposal that US may lift the 40-year ban on crude oil exports. Investors have been bracing themselves for these decisions where the hike would support the dollar, and make oil (priced in dollars) more expensive to other currency holders,” the research team explained.

“We therefore believe this scenario has been largely priced into the further decline in oil prices of both Brent and WTI since earlier this week in nearing its 2004 lows.

“We continue to maintain our ‘neutral’ stance on the sector attributed to the uncertainties of oil prices which could be further impacted by the organisation of petroleum exporting countries’ (OPEC) decision going forward and continued adverse newsflow for the sector,” CIMB Research opined.

Of note, the legislation lift was not in motion, but only at a proposed stage as part of a fiscal deal which congressional leaders have planned to avert a US government shutdown.

“For the ban to be lifted, the Republicans would need Democratic votes to help pass the plan, then both the House and Senate before it is presented to President Barack Obama to sign into law. Nevertheless, any sign of new oil entering the global market would place downward pressure on the current unstable crude oil prices,” the research team noted.

Meanwhile, US domestic crude oil according to the US EIA weekly petroleum report as of December 11, 2015 has added circa 9.3 per cent average daily production year-on-year (y-o-y), with stock piles increasing 29.2 per cent y-o-y for the same period.

“Lower oil prices, especially for light oil, has made the development of shale play less economic which has spurred the slowdown in US oil output since April this year. EIA estimates production to fall to about 8.8mbbls/day in 2016 from the low oil price levels,” the research team said.

It further highlighted, “US exports could be positive globally, as production from different nations vary in terms of the type of oil.”

However, it pointed out that not all oil is the same. “In recent years, the most increased production has been the form of lighter “sweet” crude oil, thus selling at a premium compared to heavier oil in global markets.

“A mismatch is occuring in the US with light oil pricing at a discount due to their abundant supply (46.2% supplied for motor gasoline) domestically. Imported oils largely demanded by industrial users which are heavier are brought in at higher prices,” it added.

In terms of the shale oil’s market, CIMB Research noted that shale uses a hydraulic fracturing (fracking) method, therefore making it more expensive to extract.

“With the variability of costs in extracting shale oil – every well has a different level of cost-per-barrel ranging from the lows of US$40 to over US$90 per bbl.

“If US domestic supply is freely exported, the incentive to further develop these shale resources may ignite once again although increasing global supply would continue to dampen oil prices,” it commented.

All in, the research team placed Uzma and Petra Energy as its top picks for the O&G industry. It explained, “Uzma will be buoyed by full year contribution from MMSVS (Hydraulic Workover Units), full year contribution from Premier Enterprise Corporation (PEC) for trading of chemical and other commodities in oil refinery, increase in strategic stake in Setegap Ventures from 30 to 49 per cent, Sazma aviation award, and D-18 Water injection facility for Petronas Carigali Sdn Bhd (PCSB).

“Petra Energy’s drivers include Topside Major Maintenance Services (TMM) contract by PCSB for SBO effective since July 4, 2014, and will last until May 20, 2018 with consistent work orders, work orders for the PANM contract which includes utilising five of its nine vessels, and the KBM cluster RSC.

“The group will continue to manage its costs and operation expenditures to improve its bottom-line performance, while exploring new opportunities to attain new revenue streams.”