However, its larger overseas investments this year will slash the amount spent domestically, even lower than 2018
By MARK RAO / Pic By HUSSEIN SHAHARUDDIN
Petroliam Nasional Bhd’s (Petronas) higher capital expenditure (capex) in 2019 will have limited impact on local oil and gas (O&G) firms as the state energy firm has earmarked a significant portion for overseas investments.
Petronas guided that its capex for the year will come in slightly above RM50 billion, with RM30 billion planned for upstream activities of which only half will be spent domestically.
This is higher than the total RM46.8 billion spent by the group in 2018, seemingly well for local O&G service providers who are predominantly engaged in the upstream sector and dependent on Petronas for work.
However, a local industry analyst noted that larger overseas investments by Petronas this year will slash the amount spent domestically, even lower than 2018.
“While comprising above 50% of total expenditure, domestic capex may still come in flattish or only slightly higher in 2019 (due to the higher overseas allocation),” the analyst told The Malaysian Reserve (TMR).
Malaysia made up 54% of Petronas’ total RM46.8 billion capex last year, with the remaining 46% spent on international investments. This is a marked departure for the state firm’s tradition of a 70:30 ratio in favour of Malaysia.
Its president and group CEO Tan Sri Wan Zulkiflee Wan Ariffin (picture) told a media briefing last week that Petronas will spend its capital where the opportunities are, but reiterated that Malaysian investments will remain significant going forward.
Local O&G service providers can also take comfort in Petronas activity outlook for the next three years which signals growth in brownfield activities, including rigs and supporting services, as well as onshore and offshore maintenance works.
“Petronas indicated (in the activity outlook) that it will require almost double the number of drilling rigs compared to what is being utilised today,” said the analyst.
“This uptrend in drilling activities will result in better utilisation of rigs, but have limited impact on charter rates.”
Consequently, rig owners will undertake a higher amount of work but at rates that remain depressed from oversupply, putting pressure on profit margins.
Maybank Investment Bank Bhd head for regional O&G services Liaw Thong Jung said Petronas’ higher capital allocation is positive for the services industry on paper.
“This will benefit everyone in the value chain across the board and who runs concurrent to Petronas’ 2019 to 2021 activity outlook report,” he told TMR.
He said several listed O&G firms are poised to benefit from this scenario. This includes previously maligned counters like Sapura Energy Bhd, Velesto Energy Bhd and Malaysia Marine and Heavy Engineering Holdings Bhd (MMHE).
Velesto reduced its net loss by 84.2% year-on-year to RM17.89 million for the fourth quarter ended Dec 31, 2018, on lower asset impairments and improved rig utilisation. The drilling and oilfield service provider was previously listed as UMW Oil & Gas Corp Bhd.
Sapure Energy is also in a better financial position to capitalise on industry growth following recent de-gearing exercises which were valued at a combined RM8 billion and comprised of a rights issue and planned stake sale.
The company is Malaysia’s largest O&G service provider on orderbook alone, amounting to approximately RM18.6 billion at the end of January 2019.
Meanwhile, the loss-making MMHE is perceived as among the fabricators to benefit from higher Petronas’ upstream expenditure.
Shares of the respective companies, while improving, are trading substantially lower than their pre-2014 crude oil crisis levels. This could be a buying opportunity for investors looking to tap into the future value of these companies at a bargain.
Dialog Group Bhd and Yinson Holdings Bhd are the other top O&G picks in the sector, according to Liaw.
Dialog has a close working relationship with Petronas, undertaking several Petronas-led projects in Pengerang, Johor, currently. The company has consistently been among the standout performers in the market.
Offshore service provider Yinson’s strong track record and earnings will continue to support the company in securing new contracts and growing its business. It last secured a RM2.36 billion operation and maintenance contract from JX Nippon Oil & Gas Exploration (M) Ltd.
Meanwhile, companies saddled with large debts like Bumi Armada Bhd and Alam Maritim Resources Bhd will be unable to leverage growth in the industry until they strengthen their balance sheets.
The focus for these companies will be on fiscal consolidation rather than growing their business.