KUCHING: Despite improved asset utilisation levels, persistent low charter rates continue to plague the oil and gas (O&G) sector as Petronas maintains a cautious approach t upstream exploration and development expenditures.
In a sector report, AmInvestment Bank Bhd (AmInvestment Bank) highlighted that third quarter of 2017 (3Q17) to date, contract awards have plunged by 68 per cent quarter over quarter (q-o-q) to RM689 million due to lumpy RM1 billion Bokor central processing platform in 2Q17.
“The overall trend is also dismal as the contract awards dived 45 per cent year over year (y-o-y) to RM4.9 billion in the first nine months of 2017 (9M17).
“For local operators which operate wholly offshore, these weak capital expenditure rollout prospects forebode that the worst can stretch for quite a while, especially for those struggling with high gearing such as Bumi Armada, Alam Maritim and UMW Oil and Gas,” explained the bank.
For UMW Oil & Gas and Bumi Armada, AmInvestment Bank is maintaining a ‘Hold’ call on their stocks with respective fair values of RM0.30 and RM0.79.
Looking at crude oil prices, the bank guided that they would be maintaining their 2017 project at US$50 to US$55 per barrel as current prices have averaged at US$53 per barrel since the beginning of 2017.
For 2018 however, they have raised their projection by US$5 per barrel to US$55 to US$60 per barrel following the inceased optimism post-continuation of OPEC’s production quota.
In contrast, Petronas is instead projecting a low average of US$45 per barrel for 2017 while the EIA is forecasting US$52.50 per barrel for 2017 and US$57 per barrel for 2018.
“The price trend clarity is muddle by the ability of OPEC to ensure quota compliance as prices stabilise, significant capex reductions which signal under-investment for future needs, and increasing proportion of renewable sources for electricity generation and growing adoption of fuel efficient electric vehicles could reduce consumption and lead to ‘peak oil demand’,” said the bank.
Additionally the pace of US deregulation under the Trump administration and commitment by major countries towards the Paris climate agreement could further accelerate and decelerate crude output growth.
With that in mind, AmInvestment Bank maintained its ‘neutral’ stance on the sector as its prospects for the next 12 months looks muted given that offshore development prospects remain slow.
“Our top picks are companies with stable and recurring earnings such as Dialog Group and Yinson.
“Dialog’s earnings visibility is secured by the Pengerang Deepwater Terminal project with its enlarged buffer zone while Yinson’s Ghana floating producing, storage and offloading vessel project will provide the earnings momentum over the next two years,” said the bank.
Besides that, the bank has also upgraded Petronas Gas from a ‘Sell’ call to ‘Hold’ in light og its share price falling to the bank’s fair value of RM16.65.
“We were earlier bearish on Petronas Gas due to upcoming implementation of the incenstive-based regulatory tariff setting mechanism in January next year,” they said.