Petronas spending cut to hit rig, OSV owners

PETALING JAYA: Asset owners in the rig and offshore support vessel (OSV) segments will be hit the hardest following a news report on Petroliam Nasional Bhd’s (Petronas) plans to cut as much as RM50 billion in spending in the next four years, said Hong Leong Investment Bank (HLIB) Research.
This is due to their heavy involvement in exploration and production (E&P) activities. The rig owners include UMW Oil & Gas Corp Bhd, Perisai Petroleum Teknologi Bhd, while OSV owners include Alam Maritime Resources Bhd, Icon Offshore Bhd, Dayang Enterprise Holdings Bhd and Coastal Contracts Bhd.
On top of that, HLIB Research said, upstream service providers like Uzma Bhd and SapuraKencana Petroleum Bhd will not be spared from the storm, albeit at a milder pace.
It is of the view that the Refinery and Petrochemical Integrated Development (Rapid) project will proceed given the improving prospects of the downstream industry.
“However, further delays can be expected with pricing adjustment and project prioritisation adapting to the lower crude oil price,” it said.
HLIB Research noted that downstream-related fabricators like KNM Group Bhd could still see project awards coming, albeit at a slower pace with thinner project margins.
“In contrast to upstream players, downstream players, especially refiners, have benefited from the crude oil price trend due to improvement in refining margin. Local refiners like Petron Malaysia Refining & Marketing Bhd and Shell Refining Co (Federation of Malaya) Bhd have already seen turnaround in their earnings due to improvement in refining margins,” it explained.
Among HLIB Research’s coverage universe, Bumi Armada Bhd and KNM are the companies given “buy” calls.
Meanwhile, AmResearch said there is a possibility that the RM108 billion Pacific NorthWest Liquefied Natural Gas (LNG) project in Canada, which is awaiting environmental approval from regulators to start construction, will be deferred, revised or aborted altogether.
“This could mean that Petronas could redirect its resources back to Malaysia given that the dynamics of the sector have been fundamentally altered by shale fracking techniques,” it noted.
Assuming the Canada project is deferred, PublicInvest Research said, this could account for the majority RM50 billion cuts target and hence would maintain status quo on domestic operations, as there were ongoing cuts between Petronas and its project partners and vendors during 2015.
AmResearch expects Petronas to prioritise on projects which could generate faster returns in the downstream division given the plunge in upstream activities, such as the RM119 billion Rapid in Pengerang, Johor, RM6.6 billion Sabah Ammonia Urea (Samur) in Sipitang and RM8.8 billion MLNG 9 in Bintulu, Sarawak.
“Beneficiaries from these downstream rollouts are largely foreign engineering groups but locals such as Malaysia Marine and Heavy Engineering Holdings Bhd, KNM and Dialog Group Bhd may be involved as subcontractors,” it said.
AmResearch prefers companies with stable and recurring earnings such as Dialog and Yinson Holdings Bhd as well as downstream players such as MISC Bhd, which benefit from the recovery in petroleum shipping charter rates and slowdown in new build vessels.
PublicInvest Research also highlighted that Petronas could be forced to cut dividends if cash flow constraints or reported losses are apparent despite its expectations to contribute a third of Malaysia’s government revenue.
“The reduction in capital expenditure (capex) and operating expenditure (opex) should see lower investments in operations, however it should not see any contract termination considering the national oil company’s priority to prolong and enhance production for the longer term and would need various service providers to serve this purpose,” it said.
PublicInvest Research is maintaining a “neutral” call on the oil and gas industry given a prolonged low oil price scenario pending oil supply woes that is generating negative newsflow to place further pressure on oil prices.
“Based on our oil supply analysis however, at these lower oil price levels, we should see some producers begin to slow down its supply from non-economic viability from its production costs,” it added.