KUCHING: Analysts believe that the current outlook for the oil and gas (O&G) sector in Malaysia is turning positive as downside risks to oil prices and share prices are declining, reflecting a more attractive risk-reward profile for investors.
Affin Hwang Investment Bank Bhd’s research arm (AffinHwang Capital) said the current outlook suggested downside risks to oil prices were looking more benign.
“Due to higher oil prices, we believe Malaysia’s sector contract flow could start to improve this as oil majors revisit capital expenditure (capex) plans,” it added in a report yesterday.
The research team pointed out that the decisions made by the Organisation of Petroleum Exporting Countries (OPEC) and non-OPEC to cut down production has greatly benefited the recent performance of oil prices.
“While we expect the oil price to trade in the US$50 to US$55 per barrel (bbl) range in 2017, this may be sufficient for oil majors to relook and raise their initial capex plans,” it added.
Across the value chain, the research team pointed out that production players will be the first to benefit from higher oil prices due to their oil-producing fields.
“Shipyards, fabricators, exploration drilling operators and offshore support vessels (OSV) providers will likely to be at the tail end of the recovery.
“For sector exposure, we prefer companies that are involved in the production space as compared to exploration,” it said.
As for contract flows, AffinHwang Capital expected this to pick up in 2017 based on the visible tender pipeline and as oil majors revisit their capex plans on stabilising global oil prices.
Meanwhile, Malaysia would be joining the rest of the non-OPEC countries in reducing their current output levels effectively by 20kbpd from January 2017.
“This is an effective three per cent cut based on 2016 average production levels of 667kbpd. Nonetheless, we view this positively as Petroliam Nasional Bhd (Petronas) should benefit strongly from higher oil prices, which offset lower production volume.
“As a result, we expect Petronas to show fewer constraints in terms of cash flow moving forward,” it added.
Overall, the research team upgraded its view on the O&G sector to ‘neutral’ and expect a gradual recovery of four per cent year-on-year (y-o-y) in 2017 and 11 per cent y-o-y in 2018, based on prevailing consensus views.
“While we are more positive on the sector, we have also highlighted a few companies with heightened financial risks based on our cash flow financial analysis of the Malaysia O&G universe,” it said.
Affin Hwang also introduced its Brent oil price assumptions of US$55 per bbl for 2017 and US$60 per bbl for 2017.
It based its projections on expectations of a faster-than-expected draw-down on inventories following the OPEC and non-OPEC joint effort in cutting production levels.