Higher capex cheer for oil and gas sectors

TheStar Thu, Dec 02, 2021 12:00am - 5 months View Original


Oil capex

PETALING JAYA: Having suffered slow job flows this year, the guidance by Petroliam Nasional Bhd (Petronas) for a higher capital expenditure (capex) from 2022 onwards comes as good news to domestic oil and gas (O&G) players.

National oil producer Petronas is allocating an average annual capex of RM20bil in upstream activities in 2022-2027, with 60% of the allocation benefiting the domestic upstream space.

As most of the local names in the O&G industry are equipment or service providers to Petronas, the higher capex allocation and the resulting recovery in industry activities should help boost domestic O&G players’ earnings profile.

The recently-concluded third-quarter earnings season was unexciting for the O&G sector.

RHB Research Institute said it was yet another mixed quarter for the sector. Out of the six companies it tracks, only two outperformed expectations.

Kenanga Research, on the other hand, said that all but three names within its sector coverage posted disappointing results. The brokerage tracks 12 O&G-related companies.

Petronas HQPetronas HQ

The sector’s weak performance was despite a strong set of results for Petronas in the July-September 2021 period.

The national oil producer’s performance was driven by higher product prices, even though slower progress and delays in projects following prolonged movement restrictions slowed down capex.

With borders gradually reopening, Kenanga Research expects 2022 to be a year of recovery for the O&G industry, premised on the workflow resumption after numerous stop-starts over the past two years.

The brokerage has maintained its “overweight” stance on the sector.

“Ultimately, with activity levels expected to see a massive recovery in 2022, coupled with the sector still trading at a steep discount, we still see some selective opportunities within the sector.

“Additionally, the recent weakness in Brent crude oil prices is also not too worrying, as we believe current levels will still be more than healthy to sustain a recovery in activities,” it said in a note issued yesterday.

Kenanga Research has maintained its average Brent crude oil assumption of US$65 (RM273.81) per barrel in 2022.

A more optimistic TA Securities Research and RHB Research Institute have projected the Brent crude oil price to average above US$70 (RM294.87) per barrel in 2022.

However, TA Securities Research cautioned that the outlook for the oil price is uncertain, due to the emergence of the new Omicron coronavirus variant.

“On the back of this, the Organisation of the Petroleum Exporting Countries and its oil-producing allies or Opec+ has postponed its technical meetings to early December 2021.

“This is to enable more time to assess the impact of Omicron on oil demand and prices, according to Reuters.

“Nevertheless, we retain our ‘overweight’ recommendation on the sector, as the current elevated oil price is an impetus for Petronas and other oil companies to ramp up capex spend,” it said.

Meanwhile, RHB Research Institute said it would not be surprised if Opec+ is slowing down its production ramp-up schedule of adding 400,000 barrels per day of production per month.

It is a possibility, given the uncertainties over the new Covid-19 variant detected as well as in response to the US’ strategic petroleum reserve (SPR) crude oil release.

Moving forward, TA Securities Research expects Petronas to focus on brownfield gas developments in several areas, namely, expansion projects, well drilling, production enhancement as well as platform and facilities maintenance.

As a result, demand is likely to recover for offshore fleet and services. In turn, this would catalyse a rebound in daily charter rates (DCR), fleet utilisation and new contract awards.

TA Securities Research also said that increased O&G production from Opec+ and other countries will translate to higher demand for crude and liquified natural gas (LNG) transportation.

“As such, this also translates to higher DCR for oil tankers and LNG carriers.

“Lastly, as Covid-19 restrictions are gradually uplifted, this will enable accelerated progress on O&G projects and the revival of delayed O&G capex plans,” it added.

UOB Kay Hian Malaysia Research believes that “maintenance” may be the theme for the O&G sector in 2022.

After underdelivering LNG contractual volumes since 2020 and more recently oil in the fourth quarter of 2021, it is increasingly crucial for Petronas to regain its reputation as a leading global O&G supplier, according to UOB Kay Hian Malaysia Research.

“For this, ramping up maintenance budgets (during easing movement restrictions and high O&G prices) will be necessary to rejuvenate production.

“The five-year maintenance, construction and modification contracts may be up for renewal in the near term.

Dayang Enterprise Holdings Bhd, Petra Energy Bhd and Reservoir Link Energy Bhd may have an advantage for having Sarawakian roots versus other maintenance players like T7 Global Bhd, Carimin Petroleum Bhd, Uzma Bhd and Deleum Bhd,” it said.

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