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Notwithstanding the volatility, some measure of optimism has returned for crude oil prices.

PETALING JAYA: Notwithstanding the volatility, some measure of optimism has returned for crude oil prices, which have firmed up at about US$40 per barrel after plunging into negative territory in April.

But with oil majors in no rush to resuscitate their capital expenditure (capex) spending even if oil prices recover, that would mean less jobs to go around for oil and gas (O&G) service providers.

“Global demand for oil is widely expected to pick up in the second half of the year with economies re-opening (from lockdowns due to Covid-19). For the local oil and gas scene, we are expecting activities to resurface only in 2021, ” Kenanga Research’s Steven Chan told StarBiz.He said the brokerage is still maintaining a “neutral” view on the sector as it is cautious about several companies’ balance sheet and earnings visibility, as well the overall reduction of capex and opex spending by oil majors.

“We believe many of the upstream service providers could face margin pressures as well as lower activities. New contract awards could face deferments or delays throughout the year, but we anticipate these to pick up in 2021, ” he said.

On the other hand, companies, which are able to ride out this down cycle without any significant dent in earnings, are those more exposed in the downstream space, having a resilient recurring income nature, as well as strength in their balance sheet. These are companies like Dialog Group Bhd, Serba Dinamik Holdings Bhd and Yinson Holdings Bhd, said Chan.

According to Chan, although O&G was classified as “essential services” under the movement control order to curb the spread of Covid-19, many companies still faced operational disruptions due to the restriction of movement. This will no doubt impact the bottom line results of many companies in the next Q2 reporting season. From the low base in Q1-Q2, he sees some recoveries in Q3.

In a July 1 report, AmInvestment Bank noted that in the first quarter of this year, new contract awards to Malaysian operators had dropped 74% quarter-on-quarter and 70% year-on-year to RM569mil, “with the worst fallout yet to come in Q2 onwards.”

The bank expected oil producers to proceed with their planned production cuts for this year given that global demand may not pick up to pre-Covid levels so soon with changes in consumer behaviour under a new normal, which could mean changes in energy usage.

Similar to the 20% to 30% capex reductions for 2020 which were announced by oil major like Exxon Mobil, Royal Dutch Shell and Saudi Aramco, Malaysia’s Petronas, which had earlier indicated intentions to maintain domestic capex, had also announced cuts of 21% for capital and 12% operating expenditures this year.

AmInvestment Bank said it is keeping its 2020 oil price forecast at US$40-US$45 per barrel and for 2021 at US$45-US$50 per barrel. It noted that year-to-date, Brent crude oil prices have averaged US$41/barrel while the current spot price has recovered to US$42/barrel from the year-low of US$14/barrel on April 22,2020. Even though US crude oil inventories have risen to a 40-year high of 541 million barrels, the bank said it is maintaining its crude oil price forecast at those levels for this year and next.

For comparison, the EIA’s short-term outlook projects crude oil prices at US$38/barrel for 2020 and US$48/barrel for 2021.

The bank is of the view that most participants in the sector, except those in storage and recurring maintenance services, will be adversely impacted.

“Those with upstream production-sharing contracts such as SAPURA ENERGY BHD and HIBISCUS PETROLEUM BHD will suffer from lower prices and offtake, followed by fabricators such as MALAYSIA MARINE AND HEAVY ENGineering and offshore support providers BUMI ARMADA BHD and Velesto Energy Bhd.”

Similar to the previous oil downcycle, companies with high net gearings are likely to see restructuring and refinancing exercises to reposition themselves. One challenge though is to garner shareholders or lenders support for this given the current climate, said Kenanga’s Chan.

CGS-CIMB’s analyst Raymond Yap said upstream service providers which are facing earnings stress include Sapura Energy and Velesto.

“Sapura Energy has large borrowings it is negotiating to defer payments on. Velesto is in a better position, as it has prepaid some borrowings in the past year and does not need to renegotiate its debt repayment schedule, ” Yap told StarBiz.

Excluding impairments and one-off adjustments, Sapura Energy registered a negative Ebitda of RM651mil, breaching net debt/Ebitda debt covenants for its RM10bil loans that need to be refinanced by year-end. As for Velesto, while it could reverse to a loss in 2H20 due to lower rig utilisation, its gross cash position should enable the company to meet its debt obligations for this financial year, said analysts.

In a report in late May, CGS-CIMB noted that Velesto only has a firm utilisation rate of 52.6% in FY20 based on contracts secured to-date and its management had cautioned that Petronas had warned of insufficient work to utilise all of Velesto’s rigs.

Coming to Sapura Energy, the brokerage said that while the company continues to win engineering and construction (E&C) contracts periodically, many global projects have been deferred, harming its future revenue potential. Moreover, competition for the remaining projects could be fierce and margins very thin. And in the case of drilling space, the company has not secured any new drilling contracts for at least six months, said CGS-CIMB in a June 20 report on Sapura Energy.

Where Serba Dinamik and Bumi Armada are concerned, they are in relatively comfortable at this point. The former recently raised RM456.7mil through a private placement exercise with funds to go to repay some of its bank borrowings and working capital. Meanwhile, Bumi Armada has reclassified a RM1.3bil short-term debt to long-0term.

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