PETALING JAYA: AmInvestment Research, which has maintained its crude oil price forecast at US$55/barrel-US$60/barrel (RM221.10/barrel-RM241.20/barrel) for this year, has a neutral stance on the sector given gloomy offshore development prospects.
The research house explained that the reason for maintaining its crude oil forecast was due to the increased optimism stemming from the post-continuation of Organisation of the Petroleum Exporting Countries (Opec) production quotas, geopolitical concerns in the Middle East amid concerns of a US shale oil resurgence.
“Even with the extension of Opec production quotas until the end of 2018, US crude oil production still remains elevated at the near all-time high of 9.8 million barrels/day. However, this exuberance is dampened by the slight drop of two rigs to 929 rigs for US oil and gas rigs, which is still 2.3x up from the May 2016 low of 404, with the trajectory inching higher as this is less than half of the 2011 peak of 2,026,” the research report read.
“Barring a further deterioration shift in geopolitical tensions, we view the current price dynamics at a precarious position given the persistent supply-demand imbalance,” it added.
The research house said albeit crude oil prices having crossed the US$60/barrel mark, the prospects of the segment remained gloomy given Petronas’ “unchanged view” that crude oil price ought to be “lower for longer”.
Contract awards saw a 15% year-on-year (y-o-y) decline to RM7.6 billion, last year, despite seeing a 20% quarter-on-quarter increase in the fourth quarter of last year to RM1.6 billion.
The increase was mainly from the 2018 Pan-Malaysian Transport Installation/Maintenance, Construction and Modification jobs to Sapura Energy.
“As these Pan Malaysian umbrella scope of works are mainly determined on a call-up basis, we still expect Petronas to maintain a cautious approach to upstream exploration and development expenditures,” the research house noted.
Weak capex roll-outs could also indicate that the worst can stretch for a while for Malaysian operators, which operate wholly offshore, especially those struggling with high gearing such as Bumi Armada, Alam Maritim and UMW Oil & Gas.
“We may upgrade the sector if the visibility improves for a faster pace of upstream capex rollouts, which ultimately hinges on higher crude oil price sustainability,” AmInvestment said.
An upgrade of ratings can be expected should global economy be strong enough to drive oil consumption, geopolitical tensions in the Middle East and West Africa deteriorate and US crude oil production, which is set to exceed the all-time peak of 9.6 million barrels in March 2015, faces growth constraints. On the flip side, a de-rating can be expected in the event of an oil glut.
Continued inventory expansion for US crude, slower-than-expected global economic growth, and non-compliance by Opec members to their agreed quotas, which could lead to aggressive measures to regain market shares are seen as the potential catalyst for a downgrade.
The report also noted that global funds with environmental, social and governance commitments may also avoid oil and gas stocks, following suit the footsteps of Norway-based Norges Bank Investment Management’s recent decision to exclude oil and gas stocks from its US$1 trillion fund.
Its stock picks for the year include companies with stable and recurring earnings such as Dialog Group Bhd and Yinson Holdings Bhd.
“Dialog’s earnings visibility is secured largely by the Pengerang Deepwater Terminal project with its enlarged buffer zone, while Yinson’s Ghana floating production, storage and offloading vessel project will provide the earnings momentum over the next two years,” the research house said.
Source: The Sun Daily