RHB Investment Bank O&G analyst Sean Lim: “We believe Petroliam Nasional Bhd (Petronas) and other petroleum arrangement contractors (PACs) will ask for rate cuts and discounts from their suppliers and eventually cascade the margin pressure to the services players."
PETALING JAYA: Players in the oil and gas (O&G) industry have yet to fully recover from the previous oil price rout, let alone from the effects of trade war and the coronavirus (Covid-19) pandemic.
And yet they continue to be bludgeoned, by the oil price war between Saudi Arabia and Russia and most recently, Brent oil price touching lows that have not been seen in the past 20 years.
Just as how Covid-19 is an unprecedented crisis holding global economies at its mercy, the tumbling oil price on the back of a massive crude glut is equally unparalleled in the history of oil price downfalls, triggered by the historic sub-zero fall of the West Texas Intermediate (WTI) price to a negative US$37.63 a barrel on Monday.
It took around 20 months for the Brent oil price to drop from US$110 per barrel in 2014 to US$30 per barrel in early 2016, roughly a 73% drop in a two-year period.
This time around, it took only four months for a 71% plunge to the region of US$19 per barrel as at press time, after hitting an intraday low of US$15.98 per barrel, the lowest since 1999.
There may be expectations that slight recovery would be expected in the second half of 2020 (2H20) but on a whole, 2020 would be a lost year for most industry players.
Their best bet for things to pick up would be in 2021.
Kenanga Research O&G analyst Steven Chan expects the sector to remain sluggish throughout most of 1H20, before possibly seeing slight recovery in 2H20.
He said a number of players would still be profit making albeit with lower earnings.
Chan believed bulk of the losses would come from the offshore fabrication or offshore service vessels (OSV) sub-segments.
“Naturally in a low price environment, we should expect lower activities, possible project deferments or cancellations and increased margin pressures across the board in all value chains within the industry.
“Frequency of companies going under should be much lesser as compared to before, having already survived through a stress test from the previous down-cycle, ” he said, adding that Kenanga favoured proven resilient names such as Dialog Group Bhd, Serba Dinamik Holdings Bhd, Yinson Holdings Bhd and MISC BHD, given its defensive dividend nature as a blue chip.
CGS-CIMB senior analyst Raymond Yap said generally, Dialog and MISC would benefit from this situation while other companies would see negative impacts.
He had, in early March, hinted of the beginning of a new downturn when Brent plunged to US$33 per barrel then.
RHB Investment Bank O&G analyst Sean Lim said weaker earnings performance was expected as a consequence of lower work demand, as compressed margins and the severity would depend on the sub-segments within the value chain.
He added that there was an increased risk of delay in contract awards and activities within the upstream space as Malaysia had committed to a production cut.
“We believe Petroliam Nasional Bhd (Petronas) and other petroleum arrangement contractors (PACs) will ask for rate cuts and discounts from their suppliers and eventually cascade the margin pressure to the services players.
“With that, asset-heavy services players with high gearing are likely to be affected, ” he said, adding that the situation should improve next year in view of higher oil prices, on the back of gradual rebalancing of the oil market.
Lim said the operating cashflows of oil producers would have strengthened by then and activities would start picking up.
“The bargaining power will then gradually shift back to the services players from the oil producers with a more cost cautious mode as evident in 2018, ” he said.
Schroders commodities head Mark Lacey said the biggest impact would be bankruptcies, which would not be limited to the United States as it would also likely occur in Asia, Latin America and Europe.
“Despite many oil companies cutting capital expenditure by up to 50%, many companies are going to go bankrupt. Around 80 O&G companies filed for bankruptcy in the 2015 sell-off.
“The current situation is far worse than 2015, so the industry is going to look very different after this wash out, ” he said.
JF Apex Securities analyst Lee Cherng Wee said the outlook on the sector is negative and the survivability of companies remained a question with oil prices plunging to lower levels, but he is of the opinion that there would be consolidation in the industry.
“On the supply side, the collapse of shale producers might reduce oil production, coupled with Opec and Russia’s agreement to cut production.
“On the demand side, decline in the global economy is unlikely to spur demand for oil. Any economic recovery will probably start next year, ” he said.
MIDF Research O&G analyst Noor Athila Mohd Razali viewed the current low oil price as temporary, triggered by the WTI plunge but should the situation persist for more than six months, she said there would be a significant impact on earnings moving forward.
On Petronas reducing its crude oil production by 136,000 barrels per day for May and June, Athila said that in the near to medium term, Petronas would likely reduce future exploration activities and would require lesser amount of services from O&G service providers.
“This is to contain potential cost escalation in view of the low oil price environment.
“When the market rebounds, at least for 2020, we view that the industry could potentially see a shift in business models and structures to adapt to a new operational environment post the pandemic.
“How elaborate these changes would be depends on the impact of the current low oil price environment and Covid-19 on the operations, ” she said.
https://www.thestar.com.my/business/business-news/2020/04/23/bleak-2020-for-oil-and-gas-sector
