O&G companies expected to reward shareholders

With improved crude oil prices, E&P companies are likely to register an increase of 56% YoY in operating cashflows to RM2.4t


OIL and gas (O&G) companies are expected to reward shareholders instead of ramping up capital expenditure (capex) investments despite a flat exploration and production (E&P) funding.

AmInvestment Bank Bhd analyst Alex Goh said the investment ratio is projected to reach only 42% this year compared to 65% in 2020, due to a sharp drop in prices and demand.

He said global E&P investment is expected to be flat this year, followed by a 10% increase in 2022, driven by US shale/tight oil, Middle Eastern onshore projects and offshore deepwater developments in Brazil.

“With improved crude oil prices, E&P companies are expected to register an increase of 56% year-on-year (YoY) in operating cashflows to US$580 billion (RM2.4 trillion) this year.”

“At US$60 per barrel, free cashflows for public E&P players could double to US$330 billion in 2021 from US$140 billion last year,” he said in a note last Friday.

Based on Rystad Energy’s Covid-19 April update and market outlook, herd immunity will not be achieved except in some countries in Latin America by this year given the movement restrictions being implemented globally.

“Domestic activity in Organisation for Economic Cooperation and Development countries will likely reach near 100% in second half 2021, even though international travel will not fully normalise until vaccination has been fully deployed, likely by 2023.

“As such, new technologies and behaviour will structurally change energy consumption as exemplified by the decline of business travel,” said Goh.

Notwithstanding Rystad’s flattish E&P capex expectations this year, first quarter of 2021 (1Q21) orderflows in Malaysia have improved quarter-on-quarter with listed companies announcing contracts valued at RM3.3 billion, 2.2 times increase from RM1.5 billion in 4Q20.

This represents an even more rapid surge YoY of 5.6 times from only RM569 million in 1Q20, which was drastically derailed by the onset of Covid-19 pandemic together with the short-lived Saudi-Russia oil war.

Goh maintained an ‘Overweight’ call with eight ‘Buy’ calls and one ‘Hold’.

He recommended Yinson Holdings Bhd for its strong earnings growth momentum from the full-year contributions of floating production storage and offloading (FPSO) vessels Helang (off Sarawak), Abigail-Joseph (Nigeria) and Anna Nery (Brazil) together with multi- ple charter opportunities in Brazil and Africa.

“We also continue to like Dialog Group Bhd and Serba Dinamik Holdings Bhd due to their resilient non-cyclical tank terminal and maintenance-based operations.

“Our other ‘Buy’ calls are Sapura Energy Bhd, which has just completed its RM10 billion debt restructuring package and repositioned the formidable engineering, procurement, construction, transportation and installation, and hook-up and commissioning services group to secure fresh global orders; and Petronas Gas Bhd which offers highly compelling dividend yields from its optimal capital structure strategy and resilient earnings base,” he added.

Following the sharp drop in global oil demand by 20 million barrels per day (bpd) in April last year, the gap has narrowed to 5.7 million bpd in March 2021.

Based on a monthly incremental demand of 430,000, Rystad expects a December 2021 shortfall of 1.8 million bpd compared to the pre-pandemic 2019 level, leading to 95.4 million bpd (+6.5% YoY) for 2021.

Goh said the fastest recovery is expected from East Asia, while the rest of the world will struggle with slower growth rates.

“In China, oil demand for road fuel and flight activity has almost rebounded to 2019 levels as domestic travel increased by 30%, while international flights are still down by 60%.

“In the US, road traffic and flight activities have shown improvement, while European aviation is still 60% below 2019 levels,” he explained.