How Petronas spends will determine O&G firms fate amid soft oil prices

A bulk of local service providers engaged in the upstream O&G sector are relying on Petronas’ ability to spend, says analyst


The prospects of local oil and gas (O&G) service providers in 2019 will depend more on the capital expenditure (capex) and activities of Petroliam Nasional Bhd (Petronas), as opposed to global scenario.

A bulk of Malaysian service providers engaged in the upstream O&G sector are relying on Petronas’ ability to spend, with most firms’ existing orderbooks are predominantly supported by Petronas-related contracts, said TA Securities Holdings Bhd equity research analyst Kylie Chan.

“Unlike companies like Bumi Armada Bhd and Sapura Energy Bhd who have a global reach, the rest of the O&G service providers are highly reliant on Petronas’ capex,” she told The Malaysian Reserve (TMR).

“Hence, we need to look at Petronas’ capex as opposed to global exploration and production (E&P) spending (to gauge the activities expected by the Malaysian O&G firms).”

In a recent report, Moody’s Investors Service Inc said global E&P capex will decline by 3% to 5% this year as more than half of E&P companies worldwide have indicated lesser spending amid soft oil prices early in the year.

The rating agency said global E&P capex is expected to fall this year despite production growth remaining robust though not at the record pace of 2018.

For the oilfield services and drilling industry, it said overall operating and development costs will continue to march higher and challenge margins in 2019 despite cost pressures abating since late-2018.

The continued overhang of excess equipment and muted demand will severely limit pricing power in this industry, while debt reduction is to remain elusive for major industry players in 2019, it added.

If realised, the forecast decline is unlikely to have a profound impact on Malaysian O&G service providers as they are largely dependent on Petronas for work.

However, Chan said it would be presumptuous at the moment to assume that Petronas’ expenditure will decline in line with Moody’s

In any case, the majority of O&G service providers are now operating at a lower cost-base in a more consolidated industry, thus any decline in E&P capex will have limited financial impact on these companies, she added.

Petronas’ activity outlook for 2019-2021 has highlighted a growth in brownfield activities, especially for its rigs and supporting services such as marine vessels, and an increase in onshore and offshore maintenance works.

Maybank Investment Bank Bhd research analyst Liaw Thong Jung said Petronas’ outlook indicates higher activities and more projects going forward, which in return, has given comfort to the O&G market.

However, the strength of the respective company’s balance sheet will determine how the O&G service providers are able to fare in this improving scenario, he said.

“For the O&G services industry, we need to look at balance sheet strength,” he told TMR.

“Companies that have a lean balance sheet can capitalise on this growth, but companies that are highly-geared will be unable to capitalise on the upturn.”

He said the latter will first have to sort out their balance sheet and get their accounts in order before they can leverage on the anticipated industry upturn.

“This (de-gearing) can be done by cash calls, downsizing operations and monetising assets.”

Meanwhile, Chan noted that O&G firms have been cutting down on cost while restructuring their balance sheets industry-wide.

“With the lower cost-base, any incremental rise in capex would translate into bottom-line growth,” she said.

“In contrast, companies who have not address their balance sheet concerns will be unable to capitalise on any capex growth.”

Dayang Enterprise Holdings Bhd, Petra Energy Bhd, Perdana Petroleum Bhd and Carimin Petroleum Bhd were among O&G service providers that reported improved fiscal performance for the financial quarter ended Dec 31, 2018.

The O&G sector was a surprising bright spot amid the underwhelming corporate Malaysia performance registered as at the end of 2018.

However, for companies like Bumi Armada and Alam Maritim Resources Bhd — which remains saddled with high levels of debt — it will be a narrative of fiscal consolidation as opposed to growth.

In respect to how stocks of O&G service providers are expected to perform in the market, Chan said O&G counters will trade in tandem with global oil prices as there is typically a degree of correlation between the two.

Brent crude oil prices have been on an uptrend since the start of 2019 and found renewed support following the extension of the US-China trade truce as reduced barriers to trade bode well for energy consumption growth.