More challenging environment ahead for O&G sector

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KUCHING: Analysts envisage a more challenging operating environment ahead for the oil and gas (O&G) sector in Malaysia.

The research arm of Kenanga Investment Bank Bhd (Kenanga Research) affirmed that domestic outlook remains sluggish this year with Petroliam Nasional Bhd (Petronas) slashing up to a total of RM20 billion from its capital expenditure (capex) and operating expenditure (opex), indicating further slowdown in contract awards to the local services players.

“Earlier on Monday, Petronas announced its financial year 2015 (FY15) results with core net profit plunging 45 per cent year-on-year (y-o-y) and cash flow from operations contracted by 33 per cent compared to the previous year,” it said.

“On top of that, Petronas is set to lay off 1,000 staff under the group-wide transformation plan to be more cost efficient.

“We believe the smaller capex and opex allocation will mainly affect the entire upstream segment, including drillers, offshore supporting vessels (OSV), fabricators and even maintenance players.

“While the allocation details are not in sight with only PFLNG2 project confirmed delayed, we believe the exploration and production (E&P) segment will experience further slowdown and projects such as the Canada Pacific NorthWest LNG project might be put on hold.

“For instance, PFLNG2 deferment could probably affect job replenishment for service players who had secured contracts for PFLNG1 such as Alam Maritim Resources Bhd (Alam Maritim), SapuraKencana Petroleum Bhd (SapuraKencana) and Barakah Offshore Petrolum Bhd (Barakah),” the research team opined.

It also pointed out that based on the latest reported financial statements, both Dayang Enterprise Holdings Bhd (Dayang) and Bumi Armada Bhd (Bumi Armada) may be out of the syariah compliant list by May this year as they did not fulfill the 33 per cent financial ratio benchmark.

“Dayang aims to complete its refinancing of US dollar loans through sukuk by April in order to maintain the syariah-compliant status while Bumi Armada is likely to maintain their debt portfolio to naturally hedge their business model, which is mainly denominated in US dollar,” the research team said.

Meanwhile, on the sector’s performance, Kenanga Research pointed out that last month’s earnings season saw most O&G companies made provision on impairment to their oil and gas assets amounting to as high as 50 per cent of their book value.

“This was not a surprise given that oil prices have fallen 68 per cent from its high and operating environment has turned sour with fallen rates and utilisations.

“Based on our channel checks with the players, most firms have factored in current market condition but assumed some recovery in oil prices from the current US$30l per bbl level over the next few years.

“Hence, in anticipation of a better second half of 2016 (2H16), we expect minimal impairments in the 1H16, but we do not discount further impairment in 2H16 if oil prices continue pointing south.

“Adding to that, we also observed that the average net gearing increased to 0.61-folds from 0.42-folds last year mainly due to delivery of more assets as well as reduction in equity value as a result of impairment,” the research team noted.

All in, it said O&G stocks continued to underperform the FBM KLCI in the first two months of 2016, recording an average 5.25 per cent decline year to date compared with a decline of 1.58 per cent registered by the key index over the same period. Hence, it reiterated its ‘neutral’ view on the sector.