Cyclical recovery in motion for O&G sector

Higher global oil prices will improve the govt’s revenue from oil-related contributions, petroleum royalties and other oil-related income


THE oil and gas (O&G) sector is set for a recovery in the second half of 2019 (2H19) following Petroliam Nasional Bhd’s (Petronas) strong 1H19 performance in line with global peers, said Maybank Investment Bank Bhd (Maybank IB).

“We remain positive on the sector as a cyclical recovery is in motion. We see Velesto Energy Bhd (drilling segment) as the most leveraged play on Petronas’ Activity Outlook 2019-2021, followed by Alam Maritim Resources Bhd and Icon Offshore Bhd (offshore support vessels),” it wrote in a note yesterday.

Dialog Group Bhd and Yinson Holdings Bhd are the research house’s overall key picks for the industry.

Despite the anticipated recovery, Petronas — which released its 1H19 financial results last Friday — also voiced its concerns over demand growth and geopolitically driven volatility going forward.

Petronas last Friday reported a second quarter of 2019 (2Q19) core net profit of RM13 billion (up 34% year-on-year (YoY), taking 1H19 earnings to RM25 billion (up 19% YoY).

The growth was driven by higher foreign exchange (forex) gains and hydrocarbon production, which offset lower crude oil prices (-6% to US$66 (RM276.54) per barrel).

The national oil company’s 1H19 capital expenditure (capex) amounted to RM16 billion (-21% YoY), mostly on its upstream activities.

Some 61% of the capex was domestic operations-related, driven by the group’s 2019 Activity Outlook programme. Maybank IB said Petronas remained financially resilient with a free cashflow of RM29 billion (up 33% YoY) and net cash of RM93 billion as of end-June 2019.

The oil firm said it’s staying committed to paying RM54 billion in dividends to the government this year, comprising a one-off special dividend payment of RM30 billion and a normal payout of RM24 billion.

“Petronas CEO Tan Sri Wan Zulkiflee Wan Ariffin (picture) opined following the Saudi Arabia drones attack, the elevated oil price is a short-term disruption. Nevertheless, it expects a volatile 2H19, fuelled by uncertainties over the US-China trade disputes and heightened risk of conflicts in the Middle East,” Maybank IB noted.

The investment bank is keeping its crude oil price estimate unchanged at US$63 per barrel for 2019 and US$60 per barrel for 2020.

Saudi Arabia’s Abqaiq refinery and oil processing facility and its Khurais oil field were recently attacked by drones, resulting in current production being lowered to 4.1 million barrels per day from 9.8 million previously.

This represents about 58% of Saudi Arabia’s production and 19% of total OPEC production as of August 2019, which made up 5% of global oil supplies.

Since the attack on Sept 15, Brent crude oil prices have risen by about 15% from US$60 per barrel to US$68 per barrel currently, Affin Hwang Investment Bank Bhd said in a recent note.

It said higher global oil prices will improve the government’s revenue from oil-related contributions — including Petronas dividends — petroleum royalties and other oil-related income (such as export duties on petroleum/crude oil and income from O&G exploration activities).

Twenty counters on the Bursa Malaysia Energy Index fell yesterday in line with the FTSE Bursa Malaysia KLCI (FBM KLCI) and regional markets, while just five stocks rose.

The Energy Index closed 0.72% lower at 1,118.83, while the FBM KLCI fell 0.28% and the MSCI AC Asia Pacific Index advanced 0.38%.

The Energy Index is up 36.4% for the year-to-date — heading for the best year in at least a decade, according to Bloomberg data, while the FBM KLCI is down 5.78% since the start of the year.

The Energy Index’s members have a total market capitalisation of RM54.6 billion, as opposed to the FBM KLCI’s market capitalisation of RM1.02 trillion.

Sapura Energy Bhd contributed the most to the index’s decline, losing 1.72%, while Icon Offshore had the biggest drop at 9.09%.

Bumi Armada Bhd provided the biggest boost with a 3.03% climb, while Reach Energy Bhd had the largest gain at 7.32%.

Petronas-linked counters declined throughout the day, dragging the FBM KLCI lower as investors stayed cautious ahead of updates on the latest US-China trade negotiations.

Petronas Chemicals Group Bhd lost 15 sen or 1.95% to close at RM7.54, Petronas Gas Bhd slid 20 sen or 1.2% to RM16.42 and Petronas Dagangan Bhd eased by 10 sen or 0.43% to RM23.30 at close yesterday.