Oil & Gas - overall - Capex comes off the apex
Recommendation: Over Weight
The main takeaway from The Star newspaper’s interview with Petronas’s President and CEO, Tan Sri Shamsul Azhar Abbas, is that there will be a 15-20% capex cut in 2015, potentially resulting in a capex spending of RM48bn-51bn. This would be lower than the historical high of RM63bn capex in 2012 but still the highest pre-ETP. We also believe that the capex reduction would affect the downstream segment more than the upstream, in which most of the companies under our coverage operate. Our premium valuations are under review but we keep our Overweight call on the sector. Our top picks are SapuraKencana among the big caps and Perdana among the small caps.
What Happened
Yesterday, The Star featured an interview with Tan Sri Shamsul Azhar. These are key points from the interview: 1) Petronas will cut its capex by 15-20% next year. 2) Petronas’s contribution to the government’s coffers will drop 37% in 2015, assuming that the Brent crude oil price settles at US$75/barrel in 2015. 3) Petronas will not proceed with new marginal field contract awards unless the oil price is above US$80/barrel. The breakeven point for a marginal field is US$65/barrel. 4) The capex cut will affect the projects in Pengerang that have not received the final investment decision (FID) yet but will not affect the US$27bn Pengerang Integrated Complex (PIC), in which the refinery and petrochemical integrated development (RAPID) will be located. The PIC received the FID in Apr 2014.
What We Think
The capex cut is a negative development for the sector and could hurt the sentiment further. However, while we are disappointed with the capex pullback and the sharp fall in oil prices, the share prices have dropped significantly and may have reflected most of the bad news.
Assuming that our earlier forecast for Petronas’s capex in 2015 of RM60bn (average of capex in 2012 and 2013) would be lowered by RM9bn-RM12bn to RM48bn-51bn, this would still be the highest annual capex prior to the implementation of the Economic Transformation Programme (ETP) (Figure 1). It also appears that the capex reduction would affect the downstream segment more (given the slowdown in Pengerang) than the upstream, which forms the bulk of Petronas’s net profit. Under our coverage, companies with the biggest downstream exposure are Dialog (construction and ownership of tank terminals) and Petronas Dagangan (retail).
Marginal fields are upstream initiatives but the companies that are involved in their development– including SapuraKencana, Dialog, Petra Energy, Scomi Energy and Uzma– are paid for the provision of services and have no participation in field ownership. However, the freeze may affect companies that have marginal field ambitions. We understand that the names include Bumi Armada, Daya Materials and KNM Group. See overleaf for more comments.
What You Should Do
We advise investors with long-term investment horizons to take advantage of the recent share price correction to accumulate selectively.
Source: CIMB Daybreak - 01 December 2014
Recommendation: Over Weight
The main takeaway from The Star newspaper’s interview with Petronas’s President and CEO, Tan Sri Shamsul Azhar Abbas, is that there will be a 15-20% capex cut in 2015, potentially resulting in a capex spending of RM48bn-51bn. This would be lower than the historical high of RM63bn capex in 2012 but still the highest pre-ETP. We also believe that the capex reduction would affect the downstream segment more than the upstream, in which most of the companies under our coverage operate. Our premium valuations are under review but we keep our Overweight call on the sector. Our top picks are SapuraKencana among the big caps and Perdana among the small caps.
What Happened
Yesterday, The Star featured an interview with Tan Sri Shamsul Azhar. These are key points from the interview: 1) Petronas will cut its capex by 15-20% next year. 2) Petronas’s contribution to the government’s coffers will drop 37% in 2015, assuming that the Brent crude oil price settles at US$75/barrel in 2015. 3) Petronas will not proceed with new marginal field contract awards unless the oil price is above US$80/barrel. The breakeven point for a marginal field is US$65/barrel. 4) The capex cut will affect the projects in Pengerang that have not received the final investment decision (FID) yet but will not affect the US$27bn Pengerang Integrated Complex (PIC), in which the refinery and petrochemical integrated development (RAPID) will be located. The PIC received the FID in Apr 2014.
What We Think
The capex cut is a negative development for the sector and could hurt the sentiment further. However, while we are disappointed with the capex pullback and the sharp fall in oil prices, the share prices have dropped significantly and may have reflected most of the bad news.
Assuming that our earlier forecast for Petronas’s capex in 2015 of RM60bn (average of capex in 2012 and 2013) would be lowered by RM9bn-RM12bn to RM48bn-51bn, this would still be the highest annual capex prior to the implementation of the Economic Transformation Programme (ETP) (Figure 1). It also appears that the capex reduction would affect the downstream segment more (given the slowdown in Pengerang) than the upstream, which forms the bulk of Petronas’s net profit. Under our coverage, companies with the biggest downstream exposure are Dialog (construction and ownership of tank terminals) and Petronas Dagangan (retail).
Marginal fields are upstream initiatives but the companies that are involved in their development– including SapuraKencana, Dialog, Petra Energy, Scomi Energy and Uzma– are paid for the provision of services and have no participation in field ownership. However, the freeze may affect companies that have marginal field ambitions. We understand that the names include Bumi Armada, Daya Materials and KNM Group. See overleaf for more comments.
What You Should Do
We advise investors with long-term investment horizons to take advantage of the recent share price correction to accumulate selectively.
Source: CIMB Daybreak - 01 December 2014
