Petronas’ capex for the year is expected to stand at about RM35 billion instead of the circa RM40 billion which was previously announced in view of the negative outlook in the O&G industry as fear of Covid-19 mounts. — Bernama photo
KUCHING: Analysts reassessed Petroliam Nasional Bhd’s (Petronas) capital expenditure (capex) for the year to stand at about RM35 billion instead of RM40 billion which was previously announced in view of the negative outlook in the oil and gas (O&G) industry.
According to the research arm of Hong Leong Investment Bank Bhd (HLIB Research), Petronas is expected to reduce its capex spending for the year by 21 per cent from due to the slump in oil prices.
HLIB Research recalled that Petronas previously pledged to spend about RM50 billion on capex in 2020 with about RM26 billion to RM28 billion allocated for domestic capex.
“Of this RM35 billion of capex spending, we expect about 60 per cent of it to be spent in Malaysia. With this, we foresee companies with a huge concentration risks towards Petronas contracts to suffer,” the research arm said in its O&G sector outlook for the second half of 2020 (2H20).
“We expect maintenance works umbrella contracts like the Integrated Hook-up and Commissioning (I-HUC) and the maintenance construction and modification (MCM) works awarded to Dayang Enterprise Holdings Bhd and Serba Dinamik Holdings Bhd to be deferred until oil prices reaches a higher and more stable level.
“We also foresee the postponement of fabrication and engineering works for most production platforms to be delayed and these delays would continue to plague Malaysia Marine and Heavy Engineering Holdings Bhd (MMHE) and Sapura Energy Bhd (Sapura).”
The research arm expected HUC and MCM man-hours to decline by 25 to 33 per cent in 2020 followed by gradual improvements of about five to six per cent in financial year 2021 (FY21) from Petronas’ initial targets taken from the Petronas 2020-2022 activity outlook.
Aside from the above, HLIB Research also foresees a significant reduction in Petronas’ exploration spending as most oil producing nations are working together to reduce the oversupply situation caused by the Covid-19 pandemic.
“We foresee a massive reduction in the utilisation of Jack-up rigs, Tender-rigs and this is expected to lead to lower demand for offshore support vessels (OSVs) as they are used largely to mobilise jack-up rigs.
“Recall that back in the third quarter of financial year 2016 (3QFY16), Velesto Energy Bhd (Velesto) had zero rigs utilised in for a month as Petronas has the prerogative to not utilise its rigs if need be.
“While Velesto still has most of its rigs chartered as of 1HFY20, we foresee utilisation decreasing sequentially if oil prices do not recover to a level of comfort to Petronas.”
HLIB Research also expected Sapura’s tender drilling rig segment to suffer as it is extremely reliant on Petronas to charter its tender-rigs.
“Tender rigs also tend to fare weaker in times of low oil prices as they are significantly more expensive than jack-up rigs to charter as the former are more specialised drilling rigs which can drill more wellheads at deeper depths, more suitable for large scale specialised exploration drilling.
“While OSV, which has started to show signs of recovery in 3QFY19, it has begun to deteriorate in 1QFY20 and is expected to decline further going forward as the oversupply situation of the OSV segment is expected to be exacerbated by cuts in the usage of drilling rigs and low oil prices.”
As such, the research arm believed that jack-up rig and OSV utilisation could fall as much as 30 to 40 per cent in 2HFY20 as Petronas takes a more conservative stance in its capex spending.
On petrochemicals, HLIB Research recapped that most petrochemical prices have experienced its lowest ever price in more than 10 years when Brent crude oil prices plunged to US$20 in late April and many products are still significantly below its prices in the beginning of the year.
“While polyethylene prices have gone through a steeper recovery than that of crude oil prices, we believe that the Covid-19 pandemic would still result in subdued demand for most petrochemical products and it has the potential to exacerbate demand further if a second wave of the virus were to occur.
“The lower economic activity caused by lockdowns globally has significantly decreased the demand for the formaldehyde and solvent sectors, which make up the bulk of methanol (circa 50 per cent of fertilisers and methanols (F&M) revenue) consumption.”