Saturday, January 25

Greater outlook beyond the horizon for O&G

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Through the ups and lows of oil prices, the global oil and gas (O&G) sector has been put through the wringer the past few years.

Nevertheless, optimism is picking up. One key sign lies in the upcoming listing of Saudi Aramco, Saudi Arabia’s national petroleum and natural gas company, which is slated to become the world’s largest new listing.

On Thursday, the Saudi Arabian company set its initial public offering price at 32 riyals, which analysts said would raise US$25.6 billion. This figure, if all goes according to plan, would exceed that raised by China’s online retailer Alibaba during its listing back in 2014.

Optimism is growing more so in Malaysia with corporate O&G players showing a better turn the past financial quarter.

This can be seen in a rally of O&G stocks on Bursa Malaysia in the past week. This came on the back of stabilising Brent crude oil prices, which is seen to be hovering at the US$62 per barrel mark.

Demand for oil and gas (O&G) will still be present in the near future, at least for the next 20 years, as projected by the Organization of Petroleum Exporting Countries (OPEC) in the recently released World Oil Outlook 2019.

According to OPEC in its outlook, O&G are anticipated to retain more than a 50 per cent share in global energy demand through to 2040.

Demand for gas is expected to see a rapid expansion, OPEC said, while demand for oil will likely see its growth rate slow through to 2040.

“Total primary energy demand is expected to increase by 25 per cent between 2018 and 2040 with renewables leading the way in terms of growth, but O&G are still forecast to meet more than 50 per cent of the world’s energy needs by the end of the forecast period,” OPEC said.

“These trends can also be viewed in similar forecasts from other reputable organisations with long-term energy outlooks.”

The combined contribution of the three fossil fuels – including coal – is expected to fall below 75 per cent in 2040 from more than 80 per cent currently

OPEC went on to reveal that the outlook for global oil demand has been lowered slightly this year to 110.6 million barrels per day (bpd) by 2040.

“From the perspective of oil demand, given recent signs of stress in the global economy, and the outlook for global growth, at least in the short- and medium-term, the outlook for global oil demand has been lowered slightly this year to 110.6 bpd by 2040, but demand expands in every five-year period to the end of the timeframe.”

Fossil fuels remain essential

Although renewable power generation is increasing on a global level – O&G producing countries are investing in this area to diversify their energy base – fossil fuels will remain essential to satisfy the world’s energy demand in a severe and reliable way for an extended period of time.

OPEC highlighted that a gradual shift away from coal and oil toward renewables and gas is being driven by policies and initiatives focused on increasing the share of cleaner fuels in the energy mix, particularly in power generation.

“These include binding fuel efficiency regulations and higher standards across different regions and countries. As a result, oil and coal are expected to lose nearly three percentage points (pp) and five pp of their market share, respectively, by 2040.

“The share of gas in the global energy mix is anticipated to rise by less than 2.5 pp and ‘other renewables’ (solar, wind and geothermal power) by 4.5 pp.

“Nonetheless, oil is forecast to remain the dominant fuel source, accounting for the largest share in the energy mix over the forecast period.”

Sarawak’s new refinery complex a gamechanger

On the local front,
Sarawak’s O&G will gain in the form of a proposed US$5 billion oil refinery complex in Lawas, slated for completion by 2022 if current negotiations and preparations continue as scheduled.

This comes after China’s Beijing BECA Sci-Tech Co Ltd (BECA) and Sinopec Engineering Incorporation (Sinopec) have agreed to invest US$5 billion for the proposed development of an integrated oil and gas complex in Lawas.

According to Chief Minister Datuk Patinggi Abang Johari Tun Openg, the first phase of the project to be sited on a 400 hectare land in Pulau Sari, Lawas.

“They have conducted preliminary studies on other locations in the state and identified the northern part of Sarawak, namely Lawas, to be an ideal place for them to set up a refinery plant.

“They feel that we have all the important criterias to set up the plant namely the availability of land, water supply and electricity as well as environmental stability meaning that we are outside the ‘Ring of Fire’,” he told a press conference after witnessing the signing of Memorandum of Understanding (MoU) between the Sarawak government and the two Chinese firms in June this year.

He described the refinery plant as a ‘game changer’ for Sarawak’s nothern region and foresees the project creating around 20,000 jobs during the construction period.

“The estimated target year of production for the plant is 2022 where their feedstock will come from Middle East and they will refine it in Lawas and then export to the consumer market.

“The other derivatives that can be produced from this is just like polyethylene as well as polypropylene which are basis for the plastic industries. So this is the future that we have and I think this investment, when come to reality, will definitely spread out the state’s development in the northern, southern and central regions.”

Sarawak has sizeable oil and gas reserves which have mainly been exported in the raw form and not much value adding activities to derive more benefits for the state.

As such, Abang Jo said the state now wants to take active part in the development of its oil and gas resources and the state government has taken some strategic steps to empower itself to undertake such development.

“In tandem with Sarawak’s oil and gas policy, we welcome the active participation of the private sector in the development of the state’s oil and gas sector.

“Therefore, this MoU signing is an auspicious step towards expanding our capacity and capability in the oil and gas sector instead of being mere spectator and waiting for ‘handouts’.”

More recently, the Chief Minister led a delegation of state officials last week on a two-day fact-finding trip to the Sinopec oil refining facility located at the Yangpu Economic Development Zone in Northwestern Hainan Island.

Abang Johari said the Sarawak government was serious in trying to ensure that the project would materialise as scheduled and would give the necessary support to facilitate its planning and construction.

“Our visit here is a proof of our seriousness to ensure that the refinery will materialise as planned,” he pointed out.

In a speech during a dinner in the capital city Haikou hosted by Sinopec Engineering, Abang Johari said only some slight adjustments were needed to the original planning to accommodate the approach to the runway of a new airport being planned as a supporting facility to the billion-dollar project.

He said the plant site had been identified and the deep waters of Pulau Sare would ease entry and exit of large vessels in the area.

In early November, Abang Johari also mentioned that the state government will award licences for O&G prospecting and production in the onshore areas to Petroleum Sarawak Bhd (Petros).

With the licences, he said Petros would be able to evaluate all applicants for licences or mining leases and will be empowered by the state government to facilitate all the O&G prospecting and mining activities.

Petronas’ PFLNG Dua leads the way in mobility

Meanwhile, Malaysia’s national O&G company Petroliam Nasional Bhd’s (Petronas) has been making strides on the global liquefied natural gas (LNG) stage, with the group recently naming its second floating LNG (FLNG) facility, PFLNG Dua.

According to Petronas, with PFLNG Dua, the company owns and operates two FLNG facilities, following the success of PFLNG Satu which has been in operation since 2017.

“This achievement demonstrates Petronas’ strong position in the LNG industry leading the way in innovative solutions to ensure a reliable and secure supply of LNG to meet the growing demand for cleaner energy,” the group said in its press release.

“The PFLNG Dua was successfully delivered by Petronas together with its partners, JGC Corporation and Samsung Heavy Industries, the consortium responsible for the engineering, procurement, construction, installation and commissioning of the floating LNG facility.”

Petronas noted that the latest FLNG facility opens a new source of supply for cleaner energy as it is designed to extract gas from deepwater gas reservoirs in depths up to 1,500 meters.

Petronas president and Group chief executive officer Tan Sri Wan Zulkiflee Wan Ariffin in his speech said that PFLNG Dua is a key solution by Petronas to monetise stranded deepwater gas fields in a safe, economical and sustainable manner.

“The development of PFLNG Dua is a step forward in providing a new supply source of clean energy and in realising our shared aspiration for a low carbon future,” Wan Zulkiflee added.

“As an integrated energy player, Petronas is fully invested to unlock the potential of natural gas through technology and innovative solutions in line with our Statement of Purpose to be ‘a progressive energy and solutions partner enriching lives for a sustainable future.”

A recent update by Bernama regarding PFLNG Dua revealed that it is expected to start commercial operations in November 2020.

According to Bernama, PFLNG chief executive officer Abang Yusuf Abang Puteh said the vessel, designed to extract gas from deepwater gas reservoirs in depths up to 1,500 meters is scheduled for completion and sail away from the shipyard to Malaysian waters in February 2020.

“We will be able to start it up in July, followed by commercial operation in November 2020,” he told Bernama and TV3 in an interview.

The update also revealed that PFLNG Dua will be moored over the Rotan Gas Field at a water depth of 1,300 metres, located 140 kilometres (km) offshore Kota Kinabalu, Sabah, with the capacity to produce 1.5 million tonnes of LNG per annum.

However, it cannot reach its full capacity immediately. “Like any other normal plant we need to ramp up and fine tune the unit before we can reach the maximum capacity,” he said.

He told the media that PFLNG Dua would be located in Rotan for at least 15 to 16 years in view of a number of ongoing exploration works in nearby areas.

“If there are smaller fields around Rotan that are economically viable, it makes more sense to tie it back to the floater rather than relocating it,” he added.

In other corporate updates, Petronas has awarded Block PM409 offshore Peninsular Malaysia, to EnQuest Petroleum Production Malaysia Ltd (EnQuest), a wholly-owned subsidiary of EnQuest PLC, and Petronas Carigali Sdn Bhd (Petronas Carigali) as part of the 2019 Malaysia Bidding Round.

The Production Sharing Contract (PSC) and Joint Operating Agreement (JOA) for Block PM409 was signed here today.

EnQuest is the operator for Block PM409, with a participating interest of 85 per cent, while PCSB owns the remaining 15 per cent.

The Malaysia Bidding Round is an annual event organised by Petronas to market Malaysia’s acreages to existing and new players who have the capability to unlock the potential of hydrocarbon resources in Malaysia.

Hit and miss for 3Q19 O&G overview

The third quarter of 2019 (3Q19) results for the O&G sector were a mixed bag of hits and misses, either in line with or missing analysts’ expectations.

For AmInvestment Bank Bhd (AmInvestment Bank), the results of the companies under its coverage were largely in line with expectations as five of the eight companies under its coverage came within expectations, versus two outperformers and one underperformer.

“Velesto Energy Bhd (Velesto) registered a surprisingly strong 3Q of financial year 2019 (3QFY19) net profit from a rig utilisation of 92 per cent with only one rig undergoing mandatory maintenance while Dialog Group Bhd (Dialog) enjoyed expanded plant turnaround and maintenance revenues from Petronas’ five-year master service agreement,” AmInvestment Bank said.

“As in the previous quarter, Sapura Energy Bhd (Sapura Energy) disappointed, notwithstanding a slightly lower loss stemming from minimal early-cycle fabrication margins derived from the huge central processing platform jobs for Sarawak’s Pegaga and India’s KG-DWN 98/2 NELP blocks amid a crude oil price decline.”

Similarly, Affin Hwang Investment Bank Bhd (AffinHwang Capital) was more positive on the sector’s outlook.

It recapped that the 3Q19 report card showed less disappointment as a whole with more corporates reporting earnings in line with the research firm’s expectation.

The main reason for the year on year (y-o-y) sector earnings decline, it said, was weaker due to Petronas Chemicals Group Bhd (Petronas Chemicals) earnings as a result of the continuing weak average selling prices, which led to big margin contractions, especially in the Olefins and Derivatives segment.

“On a positive note, our big cap ‘buy’ calls, Dialog and Serba Dinamik Holdings Bhd (Serba Dinamik), showed better y-o-y earnings improvement, due to a lower cost base following the completion of Phase 2 Pengerang engineering, procurement, construction and commission (EPCC) work and higher joint venture (JV) contribution for the former, and a larger order book (from RM7 billion to RM10 billion) for the latter,” AffinHwang Capital said.

The research firm also highlighted Velesto posting a strong 3Q19 profit on the back of a higher rig utilisation of 92 per cent, versus 75 per cent in 3Q18.

Support sub-industries doing well

As for the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research), O&G’s support services companies in general continued to perform well during the quarter with most benefitting from continued encouraging offshore activity levels by upstream O&G producers.

“In addition, we observed improved operations and profits coming from vessel providers, such as floating production storage and offloading (FPSO) and offshore support vessel (OSV) providers as we understand that there is limited supply of vessels currently in the market,” MIDF Research said.

“This in turn has resulted in recovery in the daily charter rates and utilisation rates for the vessels during the quarter.”

On another note, the research arm pointed out that the downstream O&G companies have also managed to maintain more-or-less their respective operating margins despite industry-specific challenges.

“That said, some profits were seen shaved slightly due to lower and less favourable average selling prices (ASPs) during the quarter which was attributable to the weak Brent crude oil price movement during the period under review.

“The outliers registering earnings below expectations for the quarter were Malaysia Marine and Heavy Engineering Holdings Bhd (MHB), Wah Seong Corporation Bhd (Wah Seong) and Petronas Dagangan Bhd (Petronas Dagangan) due to segment specific or company specific complications.”

In contrast to the above, the research arm of Kenanga Investment Bank Bhd (Kenanga Research) viewed that 3Q of current year 2019 (3QCY19) results season had higher numbers of disappointments sequentially with three underperforming counters, namely MHB, Sapura Energy and Yinson Holdings Bhd (Yinson), as compared to two last quarters.

“The two fabrication names, MHB and Sapura Energy, disappointed due to later-than-expected earnings turnarounds, dragged by higher cost upfront recognitions from new projects,” Kenanga Research said.

Nonetheless, the research arm reiterated that their order-books are relatively healthy, and that profitable turnaround is just a matter of timing.

It noted that Yinson, meanwhile, disappointed as the group slightly pushed back commencement date of FPSO Abigail-Joseph to 1QCY20, from expectations of 4QCY19 previously.

“Number of positive surprises was also lower at three, namely Dayang Enterprise Holdings Bhd (Dayang), Velesto, Wah Seong, as compared to four last quarters.

“Dayang surprised from higher work orders from topside maintenance, Velesto from its higher rig utilisation (92 per cent), while for Wah Seong it was due to steady order-book replenishment of smallish contracts.”

Having said that, 57 per cent of the names within Kenanga Research’s coverage still posted results that wdeemed to be within expectations.

“In fact, overall earnings trend year to date-first nine months of 2019 has been positive, with only Petronas-linked counters (Petronas Chemicals and Petronas Dagangan), Pantech Group Holdings Bhd, Wah Seong and Yinson posting y-o-y decline in earnings.”

Tracking the sector’s future outlook

At the time of its 3QCY19 results review publication, Kenanga Research observed that thus far, Brent crude prices have been hovering steadily in and around the US$60 per barrel mark for the past couple of months.

“We look towards OPEC’s meeting in December for some reassurance over the trajectory of oil prices, with market expectations of oil production cuts to continue, especially amid Saudi’s aim on maintaining steady oil prices ahead of Aramco initial public offering (IPO).

“That said, although we do not think any super rally in oil prices could be sustainable (barring any fundamental changes), given how intricately well balanced the oil market is, we do believe that continued production cuts from OPEC is imperative in maintaining oil prices at current levels.”

Overall, Kenanga Research maintained its average Brent crude oil price projection of US$60 per barrel for 2020.

“Locally, we are seeing a healthy surge in activities for services and equipment providers, in line with Petronas’ Activity Outlook. Drilling rigs utilisation have been on a high, with charter rates also fairly stable, while maintenance and other offshore activities have also showed a steady increase.

“We look towards Petronas’ upcoming Acitivity Outlook report (expected release in one to two months) to provide further visibility on activity levels going into 2020.”

The research arm opined that the report should maintain activity levels for the next one to two years, with even a possibility of increased plug-and-abandomnent works to come.

As such, Kenanga Research maintained ‘neutral’ on the sector, given limited upsides to Petronas’ related large-cap counters, although with increased sanguinity on services and equipment providers.

“While we acknowledge that many names within the sub-sector have posted decent share price rally throughout the year, we see a laggard-play angle in fabricators, such as MHB and Sapura Energy, and offshore players.

“While results for fabricators are still in the red, given their delayed earnings recognition as their nature of business, do note that order-book remains robust at multi-year highs, and as such, we believe that earnings turnaround is an inevitability.

“Meanwhile for offshore vessel players such as Icon Offshore Bhd, Alam Maritim Resources Bhd and Perdana Petroleum Bhd, the value-chain stands to benefit from a healthy rebound in charter rates and utilisation, although we feel that balance-sheet restructurings are still highly necessary and could pose as an immediate hurdle.”

As for AmInvestment Bank, the research firm maintained its 2019-2020 crude oil forecast of US$60-US$65 per barrel amid high volatility.

The research firm noted that following the surprise disruption to Saudi Arabia’s production from drone attacks purportedly launched by Iran-backed Yemeni Houthis in September this year, Brent crude oil prices have remained above US$60 per barrel with the YTD 2019 average at US$64 per barrel.

“With US crude inventories rising by nine per cent to 452 million barrels since early September, we maintain our 2019-2020 price forecast to US$60-65 per barrel from US$65 to US$70 per barrel.

“Since the beginning of 2019, the US Energy Information Administration’s (EIA) Short-Term Energy Outlook has continuously revised its crude oil projections, moving its Brent oil projection between US$60 per barrel and US$70 per barrel and currently settling at US$64 per barrel for 2019 and US$60 per barrel for 2020.”

All in, AmInvestment Bank maintained ‘overweight’ on the sector as prospects have radically brightened with rising asset utilisation globally which supported service providers’ improving results.

“While we have ‘buy’ calls for MISC Bhd, Sapura Energy and Velesto, our top picks are still companies with stable and recurring earnings such as Serba Dinamik and Dialog.

“We like the recurring income business model of Dialog and Serba Dinamik, which are involved in operation and maintenance services while Dialog’s earnings visibility is further secured by the Pengerang Deepwater Terminal project with its enlarged buffer zone.”