O&G’s recovery fuelled by higher energy prices

The price rally in crude oil at present is much more tactical in nature and likely short-lived, says analyst


CRUDE oil price is likely to spike to US$80 (RM332) a barrel driven by summer demand and barring a jump in supplies from OPEC+ with existing prices attracting fresh investments from oil companies.

Public Investment Bank Bhd (PublicInvest) analyst Nurzulaikha Azali noted that the price rally in crude oil at present is much more tactical in nature and likely short-lived.

“We expect oil prices to average around US$70/bbl-US$75/bbl for this year. Given this price, we believe it is attractive enough for the oil majors to increase spending, in line with progressive global economic recovery and reduction in Covid-19 cases, hence, more significant work orders available in the market,” Nurzulaikha noted in a report yesterday.

This is expected to be good news to oil and gas (O&G) support service providers although Movement Control Order (MCO) 3.0 could probably pose some nearterm challenges in terms of project execution.

Over the last 12 months, crude price has increased more than 70% from US$40/bbl in mid-June 2020 to more than US$70/bbl at present as Covid-19 restrictions were eased in the world’s largest economies, as well as disciplined output from the OPEC+ which has led to faster drawdowns of global oil inventories.

She added that the muted response so far by the shale producers has also helped sustain higher prices.

OPEC+ meeting on Monday was called off, resulting with no deal as the United Arab Emirates objected to the new output arrangement. “Without a new deal, there would be no output increase in August. This will lead oil prices to continue to climb as 5.8 mbbls/day of oil will be off the market until April 2022,” Nurzulaikha wrote.

She added that shale industry production remains below the peak of 13 mbbls/day before the Covid-19 pandemic, and now stands at about 11 mbbls/day.

As of January last year, the number of active rigs stood at 359, well below the 825 rig count in April 2019 when crude price was at a similar level.

“This shows the sensitivity of shale producers to price has declined because of capital discipline,” she said.

Last year’s global O&G upstream sector saw significant cuts in capital expenditure (capex) to US$320 billion compared to US$497 billion in 2019.

The International Energy Agency stated that investments are expected to rise by about 10% this year or equivalent to US$351 billion though remaining 29% lower than 2019 levels.

“With current oil prices hovering above US$70/bbl, we foresee this will prompt oil majors including Petroliam Nasional Bhd (Petronas) to ramp up production, expediting some of the postponed work while also executing its 2021 plans. Hence, more work orders are expected to be issued,” she stated.

Nurzulaikha expects Petronas’ capex to be more significant in the second half of 2021 onwards as the O&G is classified as an essential service.

In its first quarter of 2021 (1Q21), the national oil company’s capex spending was just RM6.7 billion or 16.8% of the full-year capex target of RM40 billion (lower end).

The amount represents a 21.2% year-on-year decline due to delayed projects and rephasing of activities resulting from the movement restrictions.

“We reckon the decline is justifiable given the seasonally bad weather due to the monsoon during the period while capex allocation was more toward the upstream segment (c. 39% in the 1Q) and of which 55% of the capex is for the domestic market,” said Nurzulaikha.

For sector exposure, PublicInvest picked Hibiscus Petroleum Bhd due to favourable crude oil prices and for it being a direct proxy, providing greater earnings visibility and its newly acquired assets from Repsol SA would also boost its earnings.

The investment bank also prefers Dayang Enterprise Holdings Bhd and Uzma Bhd as the brownfield specialists stand to benefit directly from the rise in brownfield activities (maintenance and production enhancement), as well as increased spending by the oil majors going forward.