Analysts cautious on O&G outlook in the new normal

Analysts cautious on O&G outlook in the new normal

KUCHING,. Caution is warranted for the oil and gas (O&G) sector, analysts opine, given the new normal in daily energy usage.

AmInvestment Bank Bhd (AmInvestment Bank) recapped that the bullish sentiment on oil prices stem from fresh hopes of progress in novel coronavirus vaccine trials and a weaker US dollar, albeit dented by rising unemployment data.

“Additionally, the possibility that US Congress could reach another economic stimulus package with the White House boosted expectations of demand recovery,” the research firm said.

“US President Donald Trump said that his administration is ‘looking very seriously’ at a capital gains tax cut in the hope of creating jobs, as well as an income tax cut for middle-income families.

“Saudi Aramco chief executive officer (CEO) Amin Nasser has also said that the company was optimistic about the pace of oil demand recovery in Asia, which has almost returned to the levels from before the pandemic.”

According to AmInvestment Bank, the American Petroleum Institute also reported recently that US crude oil inventories fell by four million barrels, following EIA (Energy Information Administration) statistics which showed a decline of 7.4 million barrels over the past week to 519 million barrels despite rising cases of Covid-19 in the US.

The research firm noted that this would be five per cent below the 40-year peak of 540 million barrels in June this year, pointing towards normalisation by next year.

“While these improving sentiments have driven the stock rally, we remain cautious on a sector turnaround given that demand recovery may face road blocks over the rest of the year on rising Covid-19 cases in the US, which rebounded to exceed 55,000 new cases last week.

“Even if a successful vaccine has been developed, it will take much longer for mass vaccination to be administered globally, which means that social distancing measures are likely to be maintained over the longer term together with the new normal in daily energy usage.”

Even though a measure of optimism has returned for crude oil prices, AmInvestment Bank expected oil producers 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 across the new normal.

The research firm observed that this could mean potentially long-term changes in energy usage.

“Petroliam Nasional Bhd (Petronas), which had earlier indicated intentions to maintain domestic capital expenditure (capex), has announced cuts of 21 per cent for capital and 12 per cent operating expenditure this year.

“This is similar to the 20 per cent to 30 per cent capex reductions for 2020 which were earlier announced by Exxon Mobil, Royal Dutch Shell, Saudi Aramco and Petrobras.

“In the first half of 2020 (1H20), the new contract awards to Malaysian operators dropped 62 per cent year on year (y-o-y) to RM2.2 billion, with the worst fallout yet to come in 2H20 onwards.”

Against the backdrop of a sharp demand drop in upstream oil services, AmInvestment Bank remained cautious on companies with high gearing levels such as Sapura Energy Bhd, 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 as Serba Dinamik Holdings Bhd has recently raised a 10 per cent equity placement while Bumi Armada Bhd has reclassified a RM1.3 billion short-term debt to long term due to higher asset utilisation.

“While there is a risk that Velesto Energy Bhd could reverse to a loss in 2H of financial year 2020 (2HFY20) due to lower rig utilisation, its gross cash position should be able to meet its debt obligations for this financial year.”

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