Petronas’ 2021 caution dims strong recovery hopes for sector stocks

National oil company’s conservative stance saw upstream and downstream stocks trade mixed yesterday


OIL and gas (O&G) companies that operate upstream and midstream assets including storage facilities, offshore maintenance and drilling service providers appeared unfazed with Petroliam Nasional Bhd (Petronas) cautioning of a challenging year ahead.

The Bursa Malaysia Energy Index rose 0.77% or 6.93 to 903.32 points yesterday as energy prices rose on global markets with the Brent oil futures contract for March delivery roseby67centstoUS$52.47(RM210.40) a barrel at the time of writing.

The index boasted 12 gainers and 10 laggers despite the bleak industry outlook from Petronas last week.

Wah Seong Corp Bhd was the most actively traded counter with shares rising 12% to 89 sen from 80 sen last Thursday and trading volume doubled, while Dialog Group Bhd rose 0.6% to RM3.47.

The announcement by the national oil company saw upstream and downstream stocks trade mixed yesterday despite both segments going through a downturn, operating expenses review and capital expenditure (capex) cuts due to Covid-19.

Petronas Gas Bhd rose 0.1% to RM17.20, Petronas Dagangan Bhd was flat at RM21.40 while Petronas Chemicals Group Bhd fell 3% to RM7.21.

Sapura Energy Bhd traded flat at 13 sen, while Velesto Energy Bhd closed at 14 sen. Dayang Enterprise Bhd closed 1.69% higher at RM1.21, while Uzma Bhd closed 3.54% higher at 58 sen and MISC Bhd closed lower at RM 6.70 at yesterday’s close.

Hong Leong Investment Bank Bhd (HLIB) research analyst Low Jin Wu said Petronas’ statement last week heeded the prolonged decline in demand for O&G production and products will continue to put pressure on its capital discipline.

“Petronas’ conservative stance on capex spending is expected to continue as activity levels for jack-up drilling, hook up and commissioning (HUC), and maintenance, construction and modification (MCM)

works are expected to fare weaker year-on-year (YoY), while activity levels for other segments are expected to remain flat to mildly positive,” Low said in a research note yesterday.

Petronas expects an average of 22 rigs to be chartered in the financial year of 2021 (FY21) (10 jack-up rigs, four tender rigs, five hydraulic workover units, three semi-sub/drillships) compared to an average of 18.5 rigs (11.5 jack-up rigs, 2.5 tender rigs, two hydraulic workover units, three semi-sub/drillships) in FY20.

There were as many as 23 rigs with peak utilisation in March 2020 before it started to decline due to Covid-19 and plummeting oil prices.

“While Petronas has planned for more rigs to be chartered in FY21, jack-up rig utilisation is expected to be lower YoY, which is expected to be negative for Velesto,” Low noted in the report.

The outlook for offshore support vessels is expected to be slightly better in FY21 as there are a total of 303 support vessels (Production: 131, drilling: 172) expected to be chartered compared to 279 support vessels (Production: 138, drilling: 141) in FY20.

“Lower number of drilling and project activities resulted in lower anchor handling tug supply, fast crew boats and workboat/work barge being called out for service in FY20,” said Low.

He expects slightly lower HUC and MCM man-hours for FY21 compared to FY20, but added that FY21 could be a better year for plant turnaround activities that were deferred to FY21 due to restrictions imposed during the Movement Control Order.

Low further said that fixed structures fabrication is expected to be slightly lower in FY21, while offshore installation application works are expected to be higher.

“We believe this is one of the most tepid outlooks that Petronas has produced thus far as there is no indication of a strong pick-up in activities YoY despite the dismal activity levels seen in FY20,” he further noted.

Lower jack-up drilling, HUC and MCM activities are expected to affect service providers such as Velesto and Dayang negatively.

“While Brent oil prices have breached the US$50 per barrel mark from mid-December 2020, Petronas would not have the propensity to materially elevate its capex spending this year due to its dividend obligations to the government as Malaysia thrives to recover from the Covid-19 pandemic,” Low said.

Low expects capex to start picking up from the third quarter of 2021 on the premise of a successful roll-out of vaccines and the dissipation of Covid-19.

HLIB kept its Brent oil price forecast unchanged at US$55/US$60 per barrel for FY21/FY22F and a ‘Neutral’ call on the sector.

“We are only expecting to see a strong recovery in the Malaysian O&G space in FY22 despite our expectations of higher oil prices as we believe Petronas would only elevate its spending materially in FY22,” Low said.

Read our earlier report

Petronas expects challenging 2021, maintains focus on RE