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Reality check for Malaysian oil and gas players

PETALING JAYA: Oil and gas (O&G) counters have gained much attention of late following the rise in oil prices.

Since the new year began, O&G stocks that operate in the upstream services segment such as UMW Oil & Gas Corp Bhd (UMW-OG), Sapura Energy Bhd


 and Bumi Armada Bhd


 have seen impressive gains of as much as 55% in just two weeks.

But some counters had retraced at least half of their gains by the end of last week.

Notably, they reminded that upstream O&G service players would be the biggest beneficiaries should capital spending return. However, there is no hint of the former happening just yet.

“I believe the rise and then retracement of these stocks signal that confidence has yet to fully return to the wider industry. There is still a concern that these players might not benefit immediately. The signal will come when Petronas decides that it is time to increase capital expenditure (capex) significantly again,” an analyst said.

While there was a retracement that was seen in O&G stocks, Brent crude oil has continued rising almost 4% since the new year to a high of US$69.26 per barrel and had sustained most of these gains until Friday.


“It is not business as usual like before and the recent price action (in O&G stocks) may be moving ahead of themselves, and investors may wonder why some of these counters still have not turned around or meaningfully seen a change in their fortunes,” he added.

On whether upstream activities have significantly returned to the scene, offshore services provider Alam Maritim Resources Bhd


’s managing director Datuk Azmi Ahmad told StarBiz that there has yet to be an improvement in daily charter rates.

“There is an increase in the activities in the marine support sector, which has improved the vessel utilisation rate. However, we have yet to see an improvement in the daily charter rate. We hope 2018 will be a better year for marine support services,” Azmi said.

“Oil majors have increased their requirements on marine vessels mostly through spot charters. The Pan Malaysia contracts are ongoing now and we hope to see the award of contracts in the first quarter of 2018,” he added.

StarBiz had reported in December that Petronas’ spending requirements for upstream assets such as rigs would be halved from three years ago.

The report noted that the need for jack-up rigs, which are used in exploration activities, has been reduced by half to about 10 rigs for the period 2018-2020, compared to the 2013-2014 period.

For local players, AmInvestment Bank Research said in a sector report recently that scope of works for these O&G service players is mainly determined on a call-up basis.

The research house expects Petronas to maintain its cautious tone on upstream exploration and development expenditures, noting that the worst might not really be over yet.

“For Pan Malaysia operators which operate wholly offshore, these weak capex rollout prospects forebode that the worst can stretch on for quite a while for those struggling with high gearing such as Bumi Armada Bhd, Alam Maritim and UMW-OG,” it said, maintaining its neutral call on the industry.

AmInvestment said it may upgrade the sector if the visibility improves for a faster pace of upstream capex rollouts, which would ultimately hinge on whether the higher crude oil price is sustainable.

It also did not discount the possibility of oil prices falling once again.

O&G companies have continued to see their share prices see-sawing, and in retrospect investors might have incorrectly timed their rise.

A recent case in point in relation to this phenomenon was seen at Sapura Energy.

Despite some buying action seen in its shares in the first half of 2017, its shares gave up all of those gains during the second half of last year despite a continued recovery in oil prices.

Last month, Sapura Energy shocked the market when it announced a net loss of RM274.41mil for its third quarter.

It attributed the losses to lower contributions from its engineering and construction and drilling segments, including the lesser share of profit from its joint ventures.

Sapura Energy’s shares plunged some 20% when the results were announced and fell a total of 45% for the remainder of the year until the new year where it gained traction once again.

Meanwhile, Hong Leong Investment Bank (HLIB) Research said in its report on Friday that it had raised its Brent oil price target for 2018 to US$55-US$65 per barrel, given rising geopolitical tensions that may cause sudden supply shortages which could disrupt the current balanced market.

It has retained its neutral rating on the sector as a whole, noting that while O&G companies’ earnings under coverage are believed to have bottomed in 2017, earnings recovery overall in 2018 is still not sufficient to justify a rerating on the sector as a whole.

“We elect to await clearer signs of recovery to warrant more upgrade in the sector,” HLIB Research said.

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