O&G momentum to stay intact as contracts roll out

Selected segments in the sector’s value chain to be better positioned to benefit from projects sanctioned by Petronas 


AMINVESTMENT Bank Bhd (AmInvest) remains convinced the contract roll out in the local oil and gas (O&G) sector will gather momentum, notwithstanding the Limbayong project delay or potential re-bidding exercise. 

Its analyst Alex Goh expects selected segments in the sector’s value chain to be better positioned to benefit from projects sanctioned by national oil companies, Petroliam Nasional Bhd (Petronas), such as the floating production storage and offloading (FPSO) subsector given the decimated number of operators during the previous downturn in 2015 to 2017. 

As such, AmInvest has maintained its ‘Overweight’ call on the O&G industry. 

“We continue to like Dialog Group Bhd for its resilient non-cyclical tank terminal and maintenance-based operations and Yinson Holdings Bhd for its recent win for the Parqe das Beleias FPSO charter together with strong earnings growth momentum from the full-year contributions of FPSO vessels Helang, off Sarawak, Abigail-Joseph in Nigeria and Anna Nery in Brazil, plus multiple charter opportunities in Brazil and Africa,” the AmInvest report noted. 

It added Petronas Gas Bhd (PetGas) offers highly compelling dividend yields from its optimal capital structure strategy and resilient earnings base. 

Goh noted contract awards in the third quarter of 2021 (3Q21), to Malaysian O&G operators rebounded 86% quarter-on-quarter (QoQ) to RM4.2 billion, largely from multiple jobs awarded to Sapura Energy Bhd. 

He added that excluding a lumpy RM1.5 billion construction award to Serba Dinamik Holdings Bhd to build a data centre in Abu Dhabi in August 2020, 3Q21 orders rose 41% year-on-year (YoY). 

Goh has maintained a crude oil price projection of US$70 (RM296) to US$75 per barrel for 2021 and 2022 as the Brent crude oil futures contract price has fallen from the seven-year peak of US$85 per barrel in mid-October this year to below US$70 per barrel currently on resurgent fears the Omicron could again dampen global demand. 

The investment bank added as US inventories slid 14% from the year-to-date (YTD) peak of 502 million barrels on March 26, 2021, to below pre-pandemic levels at 433 million barrels presently, 2021 to 2022 price projection is in line with the Energy Information Administration’s Short-Term Energy Outlook of US$72 per barrel for both 2021 and 2022. 

“Notwithstanding rising global vaccination rollouts, we are cautious on the emergence of new viral variants and the possibility of Iranian crude re-entering global markets, rebound in US shale production and further relaxation of the OPEC production quotas,” Goh wrote. 

Goh noted the cumulative nine months period ended Sept 30, 2021 (9MFY21), earnings delivery of the eight companies under the bank’s coverage is largely within expectations with six in line against one outperformer and one disappointment. 

The sole outperformance came from Petronas Chemicals Group Bhd which enjoyed higher product prices closely correlated to crude oil while Sapura Energy disappointed due to huge loss provisions from slower fabrication activities amid Covid-19 restrictions. 

As a comparison, there were three outperformers, two underperformers and three within expectations in the second quarter of 2021 (2Q21). 

Goh further noted in the 3Q the O&G sector’s Ebitda fell 26% QoQ to RM3.9 billion while core net profit decreased by 43% QoQ to RM1.9 billion largely due to the substantive drag from Sapura Energy’s losses. 

Excluding Sapura Energy’s results, 3Q21 Ebitda and core net profit were flat with both rising by only 1%. The stronger QoQ earnings growth surprisingly came from PetGas’ 35%, benefitting from lower internal gas consumption, decreased operating costs and joint venture foreign-exchange gains. 

Likewise, the 3Q21 Ebitda margin dropped 10% points to 30%. Excluding Sapura Energy, the margin rose slightly by 1% point to 40%, he revealed. 

Goh expects Sapura Energy’s RM7 billion short-term debt will be re-classified back to long-term debt after receiving the banks’ waiver from a breach of debt covenants but this issue could re-emerge by 4Q22 given negative Ebitda prospects for the full-year. 

Despite the significantly improved crude oil price scenario, asset-heavy companies such as Sapura Energy, Velesto Energy Bhd and Alam Maritim Resources Bhd are still struggling with heavy debt shouldered from past acquisitions during the pre-2014 crude oil price uptrend, Goh added.