KUCHING: Stocks of oil and gas players and related stocks rose yesterday, buoyed by an eight-month high of in oil prices.
Meanwhile, local O&G stocks with larger market capitalisation have been seen registering significant price hikes since last Friday.
Petronas Dagangan Bhd went up by 0.34 per cent, while Petronas Gas Bhd rose 0.83 per cent. Malaysia’s largest O&G service provider by market capitalisation, SapuraKencana Petroleum Bhd, gained 2.35 per cent.
Petronas Chemicals Group Bhd rose three sen, while Bumi Armada Bhd went up 4.23 per cent.
The quest to reduce operating cost and increasing operating efficiency is an ongoing initiative by local oil and gas service providers, highlighted MIDF Amanah Investment Bank Bhd (MIDF Research).
However, not all companies are able to meaningfully reduce operating costs in light of declining revenue.
MIDF Research noted that Brent crude oil price has staged a significant rebound to reach a 2016 high of US$51.44 per barrel. The average Brent price year-to-date currently stands at US$39 per barrel.
“In view of the steeper than expected rise in Brent crude price, we are revising our 2016 average Brent price forecast upwards to US$45 from US$40 per barrel previously,” enthused the research house.
“Despite the steep increase in crude oil price, we do not believe that offshore activity contract values, charter rates or fabrication rates will reach that of 2011 to 2014 levels when crude oil prices were hovering above US$100 per barrel.
“Even if oil prices were to sustain at current levels and possibly trade beyond US$50 for a prolonged period, it is likely that the value of new projects, contracts and charter rates would see a significant decline in terms of value compared with the glory days of US$100-dollar oil.
“As such, oil and gas service providers would need to adjust their respective cost structures to be in-line with the new norm in revenue in order to preserve profit margins and remain profitable.”
In a bid to reduce overall operating costs, oil majors such as Petroliam Nasional Bhd (Petronas) has been aggressively reducing operating costs both internally and externally via its vendors.
Dubbed Coral 2.0, Petronas is focused on reducing cost via three value levers. Petronas targets to achieve an annual cost savings of between RM4 billion to RM7.5 billion to be achieved before or by the end of the next five years.
The effects from this cost savings campaign have been felt across the local oil and gas service providers. This is evident from reducing revenue for most offshore service providers for the past many quarters.
In tandem with the decline in revenue, oil and gas service providers would need to reduce its operating cost to maximise the overall efficiency in maintaining its profit margin and sustaining profitability.
The efficiency ratio or operating cost-to-revenue ratio measures how much was spent to earn a Ringgit. Hence, the lower the ratio the better – or the more stable the ratio in relation with declining revenue the better.
“Should oil prices be able to breach higher sustainable levels in the future, we opine that companies which were able to efficiently manage cost in a low oil price environment could benefit the most,” MIDF Research analysts opined.