Brighter outlook for Malaysia’s oil and gas sector
RISING global oil prices amidst increasing Covid-19 vaccination rates and anticipated higher world economic growth rates in 2022 are brightening the outlook for Malaysia’s oil and gas sector, say research analysts.
According to the Organisation of the Petroleum Exporting Countries (Opec) in its latest monthly oil market report, world oil demand is projected to hit 100.8 million barrels per day (bpd) in 2022, exceeding pre-pandemic levels.
This is compared against global oil demand in 2021, which is now projected to average 96.7 million b/d.
“As vaccination rates rise, the Covid-19 pandemic is expected to be better managed and economic activities and mobility will firmly return to pre-Covid-19 levels. Steady economic developments are expected to support the partially delayed recovery in oil demand in various sectors,” said the cartel.
Opec pointed out that United States growth is forecast at 6.1% in 2021, supported by unprecedented fiscal and monetary stimulus, followed by projected growth of 4.1% in 2022, with further potential upside that may come from additional fiscal stimulus.
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Growth in the eurozone has also picked up strongly, especially in the second quarter of 2021, with economic growth for the entire year forecast at 4.7%, followed by 3.8% in 2022.
Meanwhile, China’s first half of 2021 (H1’21) gross domestic product (GDP) figures confirmed a stable economic recovery, albeit the renewed Covid-19 variant outbreak is forecast to limit 2021 growth at 8.5%.
“China’s anticipated softening of the H2’21 growth momentum is forecast to continue into 2022, leading to growth of 6%. India’s growth is forecast at 9% for 2021 and 6.8% in 2022,” said the cartel.
Meanwhile, Opec noted that global oil demand in the third quarter of 2021 (Q3’21) has proved to be resilient, supported by rising mobility and travelling activities, particularly in the Organisation for Economic Co-operation and Development (OECD).
However, H2’21 global oil demand has been adjusted slightly lower, partially delaying the oil demand recovery into H1’22 due to the increased risk of Covid-19 cases primarily fuelled by the Delta variant, clouding oil demand prospects going into the final quarter of the year, resulting in downward adjustments to Q4’21 estimates.
Meanwhile, AmInvestment Bank Research maintains its “overweight” call on the oil and gas sector, and says it likes Dialog Group Bhd for its resilient non-cyclical tank terminal and maintenance-based operations, as well as Yinson Holdings Bhd’s strong earnings growth momentum from the full-year contributions of floating production storage and offloading (FPSO) vessels Helang, off Sarawak, Abigail-Joseph in Nigeria and Anna Nery in Brazil, plus multiple charter opportunities in Brazil and Africa.
The research unit noted that Yinson had recently signed a memorandum of understanding (MoU) to supply a mid-sized FPSO vessel to Enauta’s Atlanta field in Brazil.
AmInvestment Bank Research also likes Sapura Energy Bhd as its completed RM10bil debt restructuring package positions the formidable engineering, procurement, construction, installation and commissioning (EPCIC) group to secure fresh global orders.
“Meanwhile, Petronas Gas Bhd offers highly compelling dividend yields from its optimal capital structure strategy and resilient earnings base,” said the research unit.
AmInvestment Bank Research is maintaining its 2021 to 2022 oil price projection at US$65 to US$70 (RM271 to RM292) per barrel as Brent crude oil prices have recovered above US$70 (RM292) per barrel currently after falling to US$65 (RM271) per barrel on Aug 20 this year on concerns that the Covid-19 Delta variant could dampen global demand.
The research unit said while United States shale production could rebound and Opec may continue to raise production quotas against the backdrop of the brighter oil price environment, this could be mitigated by rising global demand on the back of Covid-19 vaccine rollouts in H2’21.
However, AmInvestment Bank Research pointed out that the pandemic had impacted Q2’21 order flows to Malaysian oil and gas operators.
“Contract rollouts are still being impacted by the global pandemic, movement restrictions and energy transition policies, which caused Q2’21 awards to decrease 33% quarter-on-quarter to RM2.2bil,” said the research unit. It pointed out that while new contract awards in H1’21 to Malaysian oil and gas operators (excluding Serba Dinamik Holdings Bhd in light of its accounting issues raised by its former auditor) rebounded 2.6 times year-on-year to RM5.6bil, largely from multiple jobs awarded to Sapura Energy - the sharp recovery stems from the spending collapse to only RM569mil in Q1’20 due to the earlier Saudi-Russia price war and onset of the Covid-19 pandemic.
This is reflected in Petronas’ H1’21 capital expenditure (capex) decreasing by 14% year-on-year to RM12.7bil mainly due to project delays and rephasing of activities caused by movement restriction orders.
AmInvestment Bank Research noted that H1’21 appears to be below Petronas’ annual capex plans, accounting for 28% to 32% of the national company’s target of RM40bil to RM45bil over the next five years. As a comparison, H1’21 accounted for 33% to 44% of the group’s capex over the past three years.
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Petronas plans to spend 55% of the annual capex allocation on domestic investments, with the remainder on international investments.
Meanwhile, KAF Equities’ research unit also maintains its “overweight” call on the oil and gas sector, and favours companies with exposure to the downstream and tanker businesses.
“The upstream service provider subsegment is showing early signs of recovery,” said the research unit, adding Upstream Online news portal had reported that Petronas Carigali is carrying out studies for the potential deployment of a FPSO vessel on its Sepat oilfield offshore Peninsular Malaysia.
While market sources said the concept of an FPSO at Sepat is not new, and there is still no guarantee that it will proceed, KAF Equities said this could still be an opportunity for local FPSO players namely Bumi Armada Bhd, Yinson and MISC due to Petronas previous track record of preference for local service providers.
While the size of the potential project is undisclosed for now, KAF Equities estimates the new FPSO might involve daily production capacity of up to 50,000 b/d range for it to be worthwhile for Petronas to spend on the asset upgrade. Also, the Sepat field is likely to require further development or drilling to boost its production to justify extra capex for the new FPSO.
KAF Equities said for comparison purposes, it believes it would be smaller than recent proposed supply by Yinson of a mid-sized FPSO vessel to Enauta’s Atlanta field in Brazil, indicating that the potential capex for this Sepat project to be US$500mil (RM2bil) to US$600mil (2.5bil) or lower.
“Judging from balance sheet capabilities, we expect MISC and Yinson to be strong candidates if there is a bid, whereas we do not discount the possibility of non-listed players competing as well,” said the research unit.
Hong Leong Investment Bank (HLIB) Research also maintains its “overweight” call on the oil and gas sector, and said its fundamentals are turning positive, with higher oil prices, stronger commitment from Opec+ to keep oil prices afloat, higher impending capex from Petronas in H2’21 albeit not at pre-Covid levels, timeline of vaccine rollouts and the strong economic recovery from China, United States and Europe.
HLIB Research’s top picks are Bumi Armada (buy; target price: 80 sen) for its strong FPSO business and fast improving balance sheet and Dialog (buy; target price: RM3.45) as the research unit believes that its share price has bottomed out and its growth in sustainable earnings and potential for further expansions for its tank terminals business will provide upside.
The research unit also expects Petronas to elevate its capex spending in H2’21 as its financial performance has improved significantly, and this is expected to benefit most oil and gas services companies in Malaysia.
HLIB Research maintains its Brent crude oil price per barrel forecast at US$70 to US$75 (RM292 to RM313) for 2021 and 2022 as its believes that Opec + is committed to provide a good equilibrium for oil prices.
“Increasing demand from the re-opening of economies globally would neutralise Opec+’s easing of production cuts, providing a stable oil price of around US$70 (RM292) per barrel in 2021,” said the research unit.
However, Kenanga Research maintains its “neutral” call on the sector, saying that undamentals still remain largely weak, with a long-term oil price outlook of US$55 to US$60 (RM229 to RM250) per barrel.
Kenanga Research also noted that Petronas group has recently agreed to increase its financial year 2021 (FY’21) dividends by RM7bil to RM25bil, from RM18bil previously.
“While the group should have no problems meeting this commitment, given its net-cash position of RM60bil – we do note that this is still halved from two years ago (end-2019 net-cash position of RM117bil),” said the research unit.
Kenanga Research also said while upstream is still the largest area of investment for Petronas, it believes this trend of gradually diminishing upstream spending could likely continue, as the group might seek to divert some of its investments into other renewable energy sectors in efforts to keep up with current energy transition trends.
Overall, considering Petronas’ increased dividend commitments and efforts in energy transition, the research unit believes the recovery of activity levels – particularly for local-centric contractors (Velesto Energy Bhd, Uzma Bhd, Dayang Enterprise Holdings Bhd) could still be rather slow.
“Realistically, we do not expect activity levels to revert back to pre-pandemic levels any time before 2023”, said Kenanga Research.