Analysts upgrade O&G sector on oil prices

Higher oil demand in 2H21 could also neutralise OPEC+’s easing of production cuts

by NUR HAZIQAH A MALEK / Pic source:

THE oil and gas (O&G) sector has been upgraded to ‘Overweight’ by Hong Leong Investment Bank Bhd (HLIB) amid expectations of a stronger commitment from the OPEC+ to keep oil prices a oat.

Its analyst Low Jin Wu, in a research note yesterday, stated higher capital expenditure (capex) from Petroliam Nasional Bhd (Petronas) is another factor despite the level being below pre-Covid levels.

Low said there is also the timeline of vaccine rollouts and the strong economic recovery from China to take into consideration, with six ‘Buy’ calls, four ‘Hold’ calls and one ‘Sell’ call on stocks in the sector.

“Our top picks for the sector are Petronas Chemicals Group Bhd, a ‘Buy’ call with a target price (TP) of RM8.40 as we expect its strong average selling price (ASP) trend for most of its products to continue and Bumi Armada Bhd which is rated ‘Buy’ with a TP of 75 sen for its strong floating production storage and offloading (FPSO) business and fast improving balance sheet,” he said.

HLIB forecast crude oil price to average US$60 (RM243.39) a barrel for the financial year 2021 (FY21) and FY22 based on the OPEC+’s commitment to provide a good equilibrium for oil supply.

“Higher oil demand in the second half of the year (2H21) could also neutralise OPEC+’s easing of production cuts.

“Additionally, the freezing temperatures in Texas have affected most shale oil producers in the Permian basin and it could impede US’ future oil supply as it might be an onerous task for shale producers to resume production at full capacity.

“Similarly, the massive under investments on O&G capex from oil majors like Exxon Mobil Corp, Royal Dutch Shell plc and Chevron Corp would lower the future supply of oil and the strong economic recovery in China is expected to offer a strong support for oil prices,” he said.

Despite the weaker performance during the year, he believes the worst is over for Petronas.

“We anticipate its capex for FY21 to recover by 21% to RM40 billion due to higher O&G prices and the recovering Malaysian economy,” he said.

The national oil company saw a core loss in its quarter-on-quarter performance of RM1.4 billion on lower margins from lower ASP for its petroleum products, and on a year-on-year (YoY) basis, saw a decline in revenue by 31% on lower ASP for crude oil, condensates and liquefied natural gas (LNG).

Its year-to-date performance also saw an 84% YoY decline in earnings on average lower benchmark prices for all products on the back of lower sales volume mainly for sales of gas, petroleum products and LNG.

Despite the declining operating cashflow, Petronas declared a dividend of RM34 billion in FY20 compared to RM54 billion in 2019. Low said there should be less pressure for higher dividend payouts in the coming year.

“We believe there should be less pressure for higher dividend payouts from Petronas in FY21 if the Malaysian economy recovers quicker than anticipated,” he said.

Petronas’ capex fell 17% from its RM40 billion target at RM33 billion on lower crude oil prices as a result of the pandemic.

“Going forward, we believe Petronas will be able to lift its capex due to the higher oil price trend of late and the timeline of vaccination rollouts. Its capex for FY21 would come in 21% higher at around RM40 billion,” he said.

Petronas yesterday launched the Malaysia Bid Round 2021, an annual licensing round organised by the company for potential investors to grow their energy portfolio and create value, with 13 exploration blocks being offered.

Out of the 13 blocks, three are situated in the Malay basin (PM340, PM327 and PM342), four in the Sabah basin (SB409, SB412, 2W and X) and the remaining six are located in Sarawak basin (ND3A, SK4E, SK328, SK427, SK439 and SK440).