O&G service providers will benefit from work being expedited ahead of the monsoon season in 4Q
by MARK RAO/ pic by BLOOMBERG
UPSTREAM oil and gas (O&G) service providers on Bursa Malaysia are set for an improved third quarter (3Q) on higher work orders, while downstream petrochemical producers will be adversely impacted by an industry downcycle.
An analyst with a local brokerage said O&G service providers will benefit from work being expedited ahead of the monsoon season in 4Q as Petroliam Nasional Bhd (Petronas) and its production sharing contractors (PSCs) are ramping up their upstream spend.
“Many PSC have issued more work orders in 3Q in anticipation of the monsoon,” the analyst told The Malaysian Reserve (TMR).
“Petronas is rediverting a lot of their capital expenditure (capex) into the upstream segment as they are under pressure to raise production.”
Higher work orders are expected to translate into higher activity across the O&G value chain, from vessel providers to maintenance to drilling works, the analyst said.
Note the bulk of listed O&G firms in Malaysia are predominantly engaged in the upstream service segment and are dependent on Petronas and the PSC for work.
Higher upstream spend will benefit service providers such as Petra Energy Bhd, Dayang Enterprise Holdings Bhd, Carimin Petroleum Bhd, Velesto Energy Bhd and Uzma Bhd.
These companies are among the O&G stocks that noted the highest gains year-to-date in terms of share price and a strong 3Q showing will likely propel further gains.
While the higher activity levels have largely been noted across the O&G value chain, industry challenges in the offshore segment — one of the worst hit sectors during the 2014-2015 oil rout — persists.
The industry analyst said offshore support vessel (OSV) providers continue to struggle with oversupply and weak charter rates.
“While charter rates did come in 10% higher than the previous quarter, this business segment is expected to remain loss-making in 3Q or, at best, break even.”
Companies with exposure to this segment include the loss-making Icon Offshore Bhd and Alam Maritim Resources Bhd.
Bumi Armada Bhd posted a net profit of RM78.21 million in the 2Q against a RM585.48 million net loss in the corresponding 2018 period, despite revenue falling 18% yearon-year (YoY).
This was largely owing to the absence of impairment losses recognised for the quarter, while the company also registered a notable improvement in OSV fleet utilisation on higher demand locally.
Backed by fresh financing and refinancing agreements this year, the outlook for the offshore oilfield services provider is beginning to brighten and a solid 3Q showing should help consolidate that view.
Exploration and production (E&P) like Hibiscus Petroleum Bhd, Reach Energy Bhd and Sapura Energy Bhd should have less volatile energy prices for comfort, but their fortunes will depend on their cost structures as well.
The outlook for the petrochemical industry remains challenging due to the influx of supply from China and the US, and volatile demand brought on by trade uncertainties.
Another local industry analyst who spoke to TMR said commodity markets globally are soft due to the US-China trade war and deteriorating manufacturing activity worldwide.
“Demand in the petrochemical industry is a function of the trade war and the industry coming to the end of its cycle,” the analyst said.
“Significant progress on US-China trade relations will be a boon to sentiment among manufacturers and producers which, in turn, could result in an uptick in demand for petrochemical products,” he said.
Lotte Chemical Titan Holding Bhd posted a 58% YoY drop in net profit for its 3Q this year, largely owing to the fall in product selling prices which continued to squeeze margins.
This was mainly due to the diversion of cheaper polyolefin supply from the US into South-East Asia — a consequence of both the US-China trade war and softening global economic growth.