O&G service providers’ earnings to remain resilient

The resurgence of the new wave of Covid-19 infections around the world, oil prices slid on concerns if fuel demand recovery further stalls

by NUR HANANI AZMAN/ pic by AFP

EARNINGS of service providers involved in maintenance and storage tank facilities expected to remain resilient against the cyclical nature of volatile global oil prices.

Tank terminal and maintenance-based operation counters such as Dialog Group Bhd and Serba Dinamik Holdings Bhd expected to remain resilient to cyclical nature of crude oil industry dynamics, said AmInvestment Bank Research (AmBank Research) in a research note.

“We maintain our view that most participants in the sector, except those in storage and recurring maintenance services, will be adversely impacted. Those with upstream production-sharing contracts such as Sapura Energy Bhd and Hibiscus Petroleum Bhd will suffer from lower prices and offtake, followed by fabricators such as Malaysia Marine and Heavy Engineering Holdings Bhd and offshore support providers Bumi Armada Bhd and Velesto Energy Bhd,” said AmBank Research.

Serba Dinamik’s share price closed higher at RM1.64 yesterday, bringing a market capitalisation of RM5.49 billion. The engineering services provider, especially in the oil and gas (O&G) industry, recently reported is looking to develop its information and communications technology business.

Meanwhile, Dialog’s share price closed at RM3.63 yesterday, giving it a market capitalisation of RM20.7 billion.

OCBC Bank economist Howie Lee said there is uncertainty in the market and physicals are not ready to commit to immediate purchases now.

“Hence we are seeing low volatility in prices, with prices stuck in a tight range for the last month,” he told The Malaysian Reserve in an email reply yesterday.

The resurgence of the new wave of Covid-19 infections around the world, oil prices slid on concerns if fuel demand recovery further stalls.

The Brent crude oil futures contract traded at US$44.15 (RM185.43) a barrel (at press time) while the West Texas Intermediate futures contract was priced at US$41.02 a barrel.

Lee opined that prices may fall if US-China tensions continue intensifying ahead of the US Presidential Election.

Refinery margins are under strain at current inputs and could do with some breathing room from lowering oil prices, he explained.

With the advent of a Covid-19-induced end to the most recent 2015-2019 cycle, JP Morgan Chase & Co has turned its attention to potential scenarios of the next cycle’s “mid-cycle” environment and earnings power for the sector.

Given the uncertainties regarding the timing and levels of oil demand, the distribution of potential outcomes of the next cycle looks particularly wide.

The next cycle begins with the upstream still mired in a secular, supply-driven phase that could easily endure given the long tail of technology-led deflation.

“Our base case looks a lot like the one the industry just endured from 2015-2019, though more aggressive cost reduction programmes aim to reverse services margins that have dipped to less than half where they stood going into 2015.

“As activity recovers to the next mid-cycle (perhaps exiting 2022), portions of the sector could be rewarded with higher share prices (for at least some period), even if secular deflation continues its sclerotic attack on profits and cash,” it said in Global Oil Services Monthly report.