KUALA LUMPUR (May 27): The local oil and gas (O&G) related counters mostly traded in the green today despite national oil giant Petroliam Nasional Bhd (Petronas) having announced that it is planning to reduce its capital expenditure (capex) by 21% and operational expense (opex) by 12% as compared to what was previously budgeted.

As at the time of writing today, the Bursa Energy Index traded 2.2% or 17.53 points higher at 804.04, while crude oil prices traded roughly unchanged with both Brent and US West Texas Intermediate (WTI) crude prices holding steadily at around US$36 (RM156.89) per barrel and US$34 per barrel respectively.

Top gainers in the sector included Yinson Holdings Bhd, which was up 22 sen or 4% to RM5.72, while Dialog Group Bhd was up 18 sen or 5% to RM3.77.

Top active O&G counters included penny stocks KNM Group Bhd (up two sen or 9.76% to 22.5 sen), Bumi Armada Bhd (adding two sen 9.3% to 23.5 sen) and Hibiscus Petroleum Bhd (up two sen or 3.45% to 60 sen).

In an O&G sector note published today, TA Securities Research analyst Kylie Chan, who has downgraded the sector recommendation to “underweight”, highlighted that earnings and balance sheet risks loom over upstream service contractors following Petronas’ spending cuts.

“Against this dire backdrop, upstream service providers are in a precarious situation. This is due to the lack of order book replenishment, margin compression and balance sheet risks.”

“The reduction in capex spend will result in lack of new projects and contract awards. Therefore, this would lead to intense competition in an oversupplied market. Finally, this would propel a fall in daily charter rates and fleet utilisation,” Chan said.

As such, she opined that O&G players are at risk of slipping into the red, which would derail their fragile recovery since the recent 2015-17 downcycle unless they react nimbly to optimise costs.

Kenanga Research analyst Steven Chan held the same notion as Chan and expects the effects of project delays, operational disruptions and margin squeeze to cascade down to all value chains across the sector over the next few quarters, especially for local-centric players.

“The lower capex would translate into greater job deferments and lesser contracting opportunities, impacting fabricators (Sapura Energy Bhd as well as Malaysia Marine and Heavy Engineering Holdings Bhd), hook-up and commissioning works (Dayang Enterprise Holdings Bhd and Carimin Petroleum Bhd), drilling activities (Velesto Energy Bhd) as well as FPSO (floating production storage and offloading) activities (MISC Bhd and Yinson).”

“Meanwhile, the lower opex could also exert margin and pricing pressures on local-centric contractors and services providers (Dayang and Uzma Bhd). Overall lower offshore activities could also translate into slower OSV (offshore support vessel) demand, impacting players such as Perdana Petroleum Bhd, Icon Offshore Bhd and Alam Maritim Resources Bhd.”

Kenanga’s in-house average Brent crude oil price assumption, which has already taken into account a slight recovery in the second half of 2020 (2H20), currently stands at US$40 per barrel for 2020.

The research firm favours midstream companies such as Dialog and Serba Dinamik Holdings Bhd that could provide a degree of defensiveness with their resilient earnings and balance sheet.

Petronas, which reported a 68% year-on-year (y-o-y) fall in first-quarter profit after tax (PAT), said it will strive "as far as practically possible" to minimise the impact of the cuts in its Malaysian capex programme, previously planned at RM26 billion-RM28 billion for this year.

Among its three core businesses, which all recorded a weaker performance for the quarter, the upstream segment was the worst hit, with PAT falling 63.1% to RM1.93 billion from RM5.22 billion despite segment revenue climbing 6.22% to RM9.7 billion from RM9.13 billion.

Petronas also noted that while its upstream production rose slightly on higher volume from its Brazilian venture, its Malaysian gas volume fell on lower consumption by the power sector in Peninular Malaysia, likely because the movement control order (MCO) halted business and office operations nationwide.