AmInvestment sees minimal boost for offshore oil and gas players

PETALING JAYA: AmInvestment Bank does not foresee a major boost to Malaysian offshore operators given Petronas’ focus on the downstream and alternative energy in the oil and gas (O&G) sector.
Petronas president and CEO Tan Sri Wan Zulkiflee Wan Ariffin said the group is eyeing investments in further downstream operations such as specialty chemicals and renewable energy solutions, including solar.
“While companies operating in the Pengerang development such as Dialog Group and MMHE could secure fabrication jobs or off-take storage tankers contracts, the overall potential boost to the majority of the country’s domestic offshore operators will be minimal,” AmInvestment Bank said in a research note today.
However, it is keeping an “overweight” recommendation on O&G sector, given the stabilising crude oil prices above US$60 per barrel notwithstanding Petronas’ cautious capital expenditure (capex) strategy.
Petronas is targeting a 24% capex escalation to RM55 billion for 2018 after its core net profit increased 27% to RM46.6 billion in 2017 on higher crude oil prices and cost reduction initiatives.
However, with Q4 FY17 capex decreasing 14% quarter-on-quarter and 26% year-on-year to RM11 billion, the research house highlighted that the overall exploration and development spending trend is likely to be proportionately lower than for Rapid, which remains Petronas’ priority as its completion is scheduled in Q1 2019.
AmInvestment Bank maintained its 2018-2019 Brent crude oil projection at US$60 to US$65 per barrel versus West Texas Intermediate (WTI) crude oil prices of US$58 per barrel and Petronas’ internal target of US$52 per barrel for 2018.
“The Opec production quotas that were initiated in the beginning of last year appears to have suppressed US oil inventories, which have fallen by 21% from March 2017 to 423.5 million barrels, despite US daily oil production reaching above 10 million barrels, and expected to reach 11 million barrels by the end of this year,” it noted.
AmInvestment also pointed out multiple risks for the sector including the continuation of US crude inventory expansion, slower-than-expected global economic growth, accelerated adoption of fuel-efficient-cum-electric vehicles that could reduce consumption and lead to “peak oil demand”, as well as non-compliance by Opec members to their agreed quotas, which will again lead to aggressive measures to regain market shares.
The research house said its top picks are companies with stable and recurring earnings such as Dialog Group Bhd and Yinson Holdings Bhd.
“We also have ‘buys’ for Malaysia Marine and Heavy Engineering, Sapura Energy and Bumi Armada, which are trading below their intrinsic values.
“We maintain a ‘sell’ for Petronas Gas due to the Energy Commission’s upcoming announcement of the transportation tariff setting mechanism next month, which we expect to be value-eroding due to an expected lower targeted rate of return on asset values,” it added.