Bright spots in upstream O&G but will it be enough?

Contract awards expected to be reasonable in 2019 as capital activity levels have picked up since 2H18


Upstream oil and gas (O&G) activity and expenditure are expected to rise this year, despite tumultuous oil prices and worries over excessive production that could dent the commodity’s premium.

Maybank Kim Eng Securities Pte Ltd analyst Liaw Thong Jung said there has been a recovery in capital expenditure (capex) of global exploration and production (E&P) players including Petroliam Nasional Bhd (Petronas).

He said the recovery will continue this year as oil prices are expected to average US$65 (RM268.87) per barrel on the Brent Index this year.

Liaw said the price rise would be supported by the commitment to cut production by OPEC and Russia, which together account for over 50% of the world’s oil supply.

Investments in upstream activities tumbled after the 2014 global oil price rout, plunging companies into the red and leaving thousands globally unemployed. But the recent oil price surge up to US$85 had injected new hope into the sector, which is still reeling from the 2014 debacle.

Massive expenditure cuts by oil companies mean less work for upstream players who had expanded their investments during the heyday of oil prices.

MIDF Amanah Investment Bank Bhd research analyst Noor Athila Mohd Razali said O&G-related contract awards are expected to be reasonable in 2019 as capital activity levels have picked up since the second half of 2018 (2H18).

“Based on Petronas’s recent activity outlook, for the purpose of continued intensive production of O&G in Malaysia as well as abandonment and asset decommissioning, assets will be required for the (relevant) activities,” she said.

“These include exploration, development, operations and abandonment. We opine that companies that can provide drilling rigs and other support services in these areas will likely to benefit in 2019,” Noor Athila said.

But all is not smooth sailing for Asian national oil companies to strike the balance between investment plans and the current volatility in oil prices, according to Moody’s Investors Service Inc.

Its assistant VP and analyst Rachel Chua said these oil companies plan to increase capital spending in 2019 to support growing domestic needs after years of rationalising their capital investments.

“But these companies will have to balance their growth ambitions in an environment of volatile oil prices, increasing shareholder returns, soft refining margins and evolving fuel price regulations, which pose risks to their free cashflow generation and credit metrics,” she said.

She noted Petronas’ one-off special dividend of RM30 billion, on top of a RM24 billion dividend to the Malaysian government this year alone.

Nonetheless, the increased capital activity will be a boon to local O&G service providers who are dependent on Petronas and other E&P companies for work in an operating environment still marked by volatility.

However, Liaw said investors will distinguish between financially sound companies and the ones who are bleeding.

“O&G service providers can fall into two categories, namely those with balance sheet constraints and those with good balance sheets,” Liaw told The Malaysian Reserve.

“The former will need to bring their gearing down, while the latter will look for growth (via new projects and investments).”

He said investors are positive on companies that are financially sound and have strong track records, but will ignore companies facing financial constraints.

Listed oil-related local stocks are barely out of the woods with many companies still in the doldrum.

Once a dollar stock prior to the 2014 oil crisis, Alam Maritim Resources Bhd traded at or near a record low last month before recovering last Friday to close one sen higher at 8.5 sen.

The loss-making offshore service provider is currently undergoing a debt restructuring exercise via Bank Negara Malaysia’s Corporate Debt Restructuring Committee. Its total liabilities for the quarter ended Sept 30, 2018, was RM210.22 million.

Bumi Armada Bhd, which is tirelessly working to restructure its debts, traded at 15.5 sen last Friday. Another icon in the sector, Sapura Energy Bhd closed at 29 sen last Friday, far from its RM4.47 price on June 20, 2014, before the whole sector took a tumble.

CLIQ Energy Bhd is one of the latest victims. It joins a list of failed special-purpose acquisition companies (SPACs) in Malaysia, after failing to secure a qualifying asset within the set deadline.

The would-be O&G company will distribute the remaining monies held in its cash trust account by the end of this month before it exits Bursa Malaysia Securities Bhd.

Hibiscus Petroleum Bhd and Reach Energy Bhd are the only successful SPACs in the country to-date, but have seen their respective share prices shredded due to low crude oil prices.

However, Serba Dinamik Holdings Bhd and Dialog Group Bhd are some of the bright spots in the industry. Both companies’ shares closed lower last Friday at RM3.66 (down eight sen) and RM2.91 (down eight sen) respectively.