Going forward, the research arm expected Petronas’ net cash position to further weaken as the operating cash flow generated in the first nine months of 2016 (9M16) is merely sufficient to cover the group’s committed capital expenditure.
KUCHING: The oil and gas sector is expected by the research arm of Kenanga Investment Bank Bhd (Kenanga Research) to remain unexciting with limited catalysts, in view of flattish oil prices.
According to Kenanga Research, crude prices have been very volatile, responding to Organization of the Petroleum Exporting Countries (OPEC)-related news.
“Despite being sceptical over the possibility of a successful outcome in the coming meeting at the end of the month, we reckon OPEC will strive to make more progress to avoid losing credibility after multiple discussions,” it said.
That said, the research arm believed oil prices outlook will be capped when the market refocuses back on revival of US shale gas production.
Recent news reports quoted Scott Sheffield, chief executive officer (CEO) of Permian basin-based company Pioneer Natural Resources who said that the region is likely to be comparable with the conventional production from the Middle East at breakeven price of US$30 per barrel (bbl) following service cost rationalisation and productivity gain.
“He also estimated that Permian basin which contributed almost a quarter of US production to hit five million bbl per day in 10 years’ time from current production of two million bbl per day,” the research arm said.
On Petroliam Nasional Bhd (Petronas), the group revealed in a press release that Petronas’ profit after tax (PAT) for the third quarter of 2016 (3Q16) rose from RM1.6 billion to RM6.1 billion, a significant improvement from the previous quarter.
“Cumulatively, Petronas’ PAT for the nine month period ended September 30, 2016 was RM12.3 billion, a 48 per cent decline compared to RM23.8 billion recorded the year before.
“This was posted on the back of RM146.3 billion revenue, which fell by 22 per cent from 2015,” the group said.
Kenanga Research highlighted that the group’s balance sheet remained firm with net cash position of RM51.9 billion even though it has deteriorated from RM66.8 billion in 4Q15.
Going forward, the research arm expected Petronas’ net cash position to further weaken as the operating cash flow generated in the first nine months of 2016 (9M16) is merely sufficient to cover the group’s committed capital expenditure (capex).
Kenanga Research noted that Petronas is committed to pay RM16 billion dividend this year, RM10 billion lower than a year ago.
“Petronas has paid RM12 billion worth of dividend in 9M16 and is expected to pay the outstanding RM4 billion in 4Q16.
“Therefore, Petronas will continue to prioritise cash flow management amidst tight capex spending,” it said.
The research arm continued to hold the view that capex and operating expenditure (opex) allocations will be rather selective.
It added that new round of contract awards from Petronas such as Pan Malaysia transport and installaton (T&I) contract, topside maintenance job and IRM Peninsular Malaysia are likely to materialise in the near-term and potential beneficiaries are Sapurakencana Petroleum Bhd (Sapurakencana), Dayang Enterprise Holdings Bhd and Barakah Offshore Petroleum Bhd.
Overall, Petronas’s weakening net cash position was no surprise to Kenanga Research amidst challenging operating environment.
“In view of flattish oil prices (maintaining our forecast 2016-17 average Brent crude price at US$47-51 per bbl), the sector will remain unexciting with limited catalysts,” the research arm said.
Kenanga Research advocated investors to avoid highly leveraged stocks and look out for strong contract flow as firm earnings recovery indicator.
In all, Yinson Holdings Bhd remained the research arm’s preferred pick within the upstream segment on the group’s resilient earnings outlook.
Meanwhile, Sapurakencana, in the research arm’s view, remained the best proxy to trade the volatility in oil prices given the group’s oil production profile, which will directly benefit from stronger oil prices.