Interest in O&G companies rises in tandem with earnings
INVESTOR interest in local oil and gas (O&G) service providers is picking up after years of a lull, although there is a softening in global crude oil prices. As earnings improve, analysts expect the upward momentum in the share prices of these players to rise in tandem.
Maybank Investment Bank Research analyst Liaw Thong Jung expects most O&G service providers to return to profitability next year on the back of a consistent flow of new contracts.
“We expect an improved outlook for these O&G service providers. That said, de-gearing remains a key agenda, apart from improved cost management. With the O&G market in an upward cycle, demand for services has returned, and it is about time,” he tells The Edge.
O&G service providers are enjoying higher daily charter rates, albeit gradually, he says, and increasing utilisation of their assets. “We are seeing an uptick in day rates and utilisation, as well as lengthening of contracts as clients [oil companies] take the opportunity to lock in these assets for their capital expenditure programmes.”
Liaw expects capex allocations by the oil majors would also benefit service providers, especially those operating in the upstream sector.
Even so, he does not rule out any potential mergers and acquisitions (M&A) in the O&G industry, given that there are far too many domestic players. “We have begun to see a few in the market,” Liaw observes.
For years, the O&G sector has been suffering from underinvestment. That changed this year, as the price of global crude oil has remained elevated, owing to increasing demand, a tight supply market and the Russia-Ukraine war, which has prompted several O&G majors to increase capex.
In July, national oil company Petroliam Nasional Bhd (Petronas) announced plans to double its capex to RM60 billion this year from 2021, to “catch up” with projects that were delayed because of the Covid-19 pandemic.
RHB Research’s Sean Lim believes local upstream activities will remain robust in 2023 on sustainable capex and operating expenditure by Petronas.
“This will further anchor the earnings recovery within the local O&G service providers space. Besides, services rates are also rising amid tight demand and this will help widen their margins or at least help cushion the rising cost of doing business,” he tells The Edge.
He expects Petronas’ capex in 2023 to be lower than this year, however, at RM45 billion to RM50 billion, owing to the absence of lumpy acquisitions such as Petronas Chemicals’ Perstorp.
In an Oct 25 report on the O&G sector, Lim recommends Yinson Holdings Bhd, Bumi Armada Bhd and Coastal Contracts Bhd as his top picks of stocks driven by higher spending by oil majors.
“While the National Energy Policy (NEP) 2022-2040 calls for more aggressive emission reduction initiatives, the expectation of additional investments in deepwater and sour gas projects could provide job opportunities for upstream players in the medium term,” writes Lim.
O&G upstream activities are projected to remain elevated to capitalise on high oil prices, according to Lim, “We expect more domestic maintenance and drilling contracts to be awarded, with the possibility of higher rate revisions to cushion the rising cost of doing business amid tighter supply. On the international front, we remain bullish on the floating production storage and offloading (FPSO) space — backed by a healthy project pipeline while major contractors remain occupied with contracts in hand,” he says.
Yinson and Bumi Armada are among the top players in the FPSO space, with order books of RM70 billion and RM13.1 billion respectively.
Since the beginning of November, share prices of local O&G service providers have gained between 9.3% and 41%, while the Bursa Malaysia Energy Index added almost 13% to reach 785.31 points as at Dec 1.
Companies such as Perdana Petroleum Bhd spiked 41% to 12 sen a share in November, while Malaysia Marine and Heavy Engineering Holdings Bhd (MMHE) surged more than 28% to 54 sen apiece. Icon Offshore Bhd and Uzma Bhd jumped 24% and 21% to 1.55 sen and 46 sen per share respectively.
Investors who took a bet in some of the O&G companies since the beginning of the year are reaping handsome returns despite the sector’s overall bearish sentiment.
For instance, Dayang Enterprise Holdings Bhd’s share price has surged almost 74% year to date to RM1.40, Deleum Bhd gained 66% to 79 sen, Coastal Contracts Bhd 63% to RM2.23, while Icon Offshore Bhd, Hibiscus Petroleum Bhd and MMHE increased 48%, 39% and 36.7% respectively.
A significant improvement in earnings has fuelled the share price performance.
Take Dayang, for instance. Its net profit almost tripled to RM52.90 million in the third quarter ended Sept 30, 2022, from RM18.98 million a year earlier, driven by increased work orders and contracts from oil majors, higher vessel utilisation rates and a RM7.4 million insurance claim received for an incident involving Dayang Topaz in 2020.
Cumulatively, for the first nine months of FY2022, Dayang posted a net profit of RM108.68 million, compared with a net loss of RM30.45 million in the same period of FY2021, on the back of a 62.94% jump in revenue to RM761.89 million from RM467.58 million previously.
Meanwhile, Icon Offshore announced a surprise special dividend of 6.7 sen per share, which is a dividend yield of about 43% based on its current share price of 15.5 sen. The bumper dividend was announced following the company’s disposal of its jack-up rig vessel for RM381.65 million — more than double the price it paid in 2020 when crude oil prices crashed to below zero.
Oil prices to stay elevated
Despite the recent weakness in global crude oil prices, market observers reckon that prices will remain elevated as the Organization of the Petroleum Exporting Countries (Opec) and its allies (Opec+) continue to curb production.
Liaw of Maybank IB says the tight supply in the oil market is due to the underinvestment in the sector that began in 2014, after Brent crude oil collapsed to below US$30 per barrel from more than US$100 per barrel.
The pandemic, which started in early 2020, further exacerbated the situation, depressing oil prices to sub-zero.
“From the fundamentals perspectives, with demand rising and supply at similar year-on-year levels, oil prices should remain elevated in 2023. We have yet to see any new supply such as new fields coming into production.
“The structural underinvestment in the past [since 2014] is being paid to the supply side now,” says Liaw who concurs that the Opec+ policy direction will also dictate the strength of the oil price throughout 2023.
Opec+ will hold a meeting this Sunday (Dec 4) and, according to Bloomberg, of the 17 traders and analysts surveyed, 10 anticipate a new supply cutback, with estimates ranging from 250,000 to two million barrels per day.
It is worth noting that in October, the world’s most powerful alliance of oil producers made a surprise production cut of two million barrels a day, the largest since the outbreak of the pandemic in 2020.
Goldman Sachs has lowered its oil price forecast by US$10 to US$100 per barrel for the fourth quarter of 2022, citing rising Covid concerns in China.
“The market is right to be anxious about forward fundamentals, owing to significant Covid cases in China and a lack of clarity on the implementation of the G7’s price cap,” Goldman economists, including Jeffrey Currie, said in a note. They said more lockdowns in China would be equivalent to the deep production cuts imposed by Opec+ of two million barrels per day.
One O&G analyst expects that the possibility of more lockdowns in China, which is the world’s top importer of oil, could affect global demand and will dent prices further.
Chinese citizens last month protested the country’s zero-Covid policy after prolonged lockdowns. Following the unprecedented protests that swept China, several cities have taken steps to ease some Covid-19 restrictions and a top official has signalled a softer approach to virus controls, according to Reuters.
Crude oil prices responded positively to the news of easing as Brent crude rallied 2.2% to US$88.88 per barrel on Dec 1 as traders bet that China would further lift restrictions.
In addition, US government data showed that crude stockpiles plummeted by 12.6 million barrels last week, the biggest decline since June 2019.
“If China’s Covid rules are slowly eased and Opec stays the course, crude prices could rally another 5% to 10% here,” said Oanda Corp.
In recent months, Brent crude prices have fluctuated, rocketing to more than US$120 in early June amid doubts that OPEC+ oil producers could ease tight supply despite a higher output target and falling below US$82 last month on a stronger US dollar and growing fears of a global recession — even as producing countries cut production.
http://www.theedgemarkets.com/article/interest-og-companies-rises-tandem-earnings
