Optimism over oil prices returns but risks remain: AmInvestment Research

PETALING JAYA: Even though a measure of optimism has returned for crude oil prices, oil producers are expected to proceed with their planned production cuts for this year, given that demand globally remains depressed amid the prolonged Covid-19 movement restrictions and social distancing measures which could mean potentially long-term changes in energy usage.

In a report, AmInvestment Research said Petronas, which had earlier indicated intentions to maintain domestic capex, has announced cuts of 21% for capital and 12% operating expenditure this year – similar to the reductions taken by other global oil majors.

Furthermore, in 1H’20, the new contract awards to Malaysian operators dropped 62% year-on-year (yoy) to RM2.2 billion, with the worst fallout yet to come in 2H2020 onwards.

“We maintain our view that most participants in the sector, except those in storage and recurring maintenance services, will be adversely impacted. Those with upstream production-sharing contracts such as Sapura Energy and Hibiscus Petroleum will suffer from lower prices and offtake, followed by fabricators such as MMHE and offshore support providers Bumi Armada and Velesto Energy.

“However, the earnings of service providers involved in maintenance and tank storage facilities such as Dialog Group and Serba Dinamik will be resilient against the cyclical nature of industry dynamics,” it said.

It also advised caution on companies with high gearing levels such as Sapura Energy, which needs to restructure its RM10 billion debt by the end of this year.

“However, the rest of the players are relatively comfortable at this juncture. While there is a risk that Velesto could reverse to a loss in 2H’20 due to lower rig utilisation, its gross cash position should be able to meet its debt obligations for this financial year,” it said.

The research house is maintaining its 2020 oil price forecast at US$40-US$45/barrel and 2021 at US$45-50/barrel.

It is also keeping its neutral call on the sector, with buy calls on Dialog Group, Serba Dinamik and Petronas Chemicals Group.

“However, as we continue to view the still low oil prices and earnings of upstream service companies to be worse than the previous 2015–2017 down-cycle which led to multiple financial distress to O&G corporations, we retain our sell calls for Bumi Armada, Sapura Energy and Velesto Energy.”