By Khairul Khalid
Opec’s decision not to cut production and Iran’s reentry into the global market are expected to add further downward pressure to oil prices. Malaysia’s oil & gas players should expect no respite and brace themselves for further turbulence.
Sector background: On Dec 4, the Organisation of Petroleum Exporting Countries (Opec) met in Vienna and decided to maintain the current production levels of crude oil at around 31.5 million barrels per day, instead of reducing output to improve oil prices.
This disappointed many oil-producing countries, especially the smaller ones, who were hopeful of a production cut to lift oil prices that have collapsed almost 50% in the last 18 months due to a severe oversupply and slacking global demand.
According to Opec, it was not able to reach any change in output targets considering several factors such as Iran’s oncoming production levels and non-Opec production that is not governed by any cartel. The cartel said that it will be monitoring developments and will meet up again in January 2016.
Brent crude oil (a widely used oil price benchmark) is currently hovering at just above US$40 per barrel compared to US$100 levels in the middle last year.
Iran is returning to global oil markets next year after nuclear-related sanctions are lifted next year. It is targeting to produce an additional 500,000 to one million barrels per day in early 2016. The sanctions on Iran were imposed in by the US and European Union in 2012. Prior to the sanctions, Iran was producing around 2.6 million barrels per day.
Indonesia has also resumed its full membership to Opec. This would add an estimated 850,000 barrels per day to Opec’s previous oil production ceiling of 30 million barrels.
Currently Opec’s 12 member countries are Algeria, Angola, Ecuador,Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela. Opec generates an estimated 45% of the world’s total crude and more than 20% of the world’s natural gas production.
The plunge in oil prices has had a significant impact on Malaysia’s oil and gas (O&G) industry. For example, profits at state-owned Petronas have dropped tremendously in four successive quarters. Many local O&G players are dependent on Petronas for jobs.
Last October, Petronas posted results of its third quarter of its financial year 2015, one of its worst-ever quarterly performance. Profit after tax dropped drastically by 91% year-on-year to RM1.4 billion, on the back of RM60 billion revenue (down 25% year-on-year).
Much of the poor results have been blamed on the fall in oil prices that have affected Petronas’ upstream business (exploration and production segment). Last month, Petronas president and group chief executive officer Wan Zulkiflee Wan Ariffin reiterated his call for the country’s O&G players to consolidate urgently.
Wan Zulkiflee said that the industry is too crowded and there simply aren’t enough jobs currently for local O&G companies, mainly due to cost-cutting measures implemented after the crash of oil prices.
What analysts think: According to an O&G sector report by UOB Kay Hian dated Dec 7, Opec’s recent decision not to reduce production output could lead to even lower prices.
“This (the Opec decision) is within our expectations. Nevertheless, this event will add on to more bear signals and downside risk on oil prices,” said UOB Kay Hian.
According to UOB Kay Hian, although Petronas’ capital expenditure (capex) for 2016 to 2020 is expected to be higher (RM350 billion) versus RM300 billion in 2011 to 2015), next year will see the local O&G sector remain sluggish due to the continuing low oil prices.
“Petronas has shifted its focus to downstream/development and production (D&P) activities. We do not see a strong catalyst for upstream-centric players which form the majority of the sector. We continue to view 2016 as another year of poor earnings visibility, lacking signs of activity recovery,” said UOB Kay Hian.
UOB Kay Hian also said that local O&G service players with high dependence on Petronas jobs like Barakah, Deleum, Malaysia Marine and Heavy Engineering (MMHE), Perisai, Dayang and UMW O&G will be affected due to subdued upstream capex spending.
“Stocks under our coverage that could face earnings risk in 2016 are SapuraKencana, Bumi Armada, Barakah, Deleum, MMHE and Perisai. We have “sell” on MMHE, Deleum, Barakah and Perisai. Dialog is our sole ‘buy’ call for the sector,” said UOB Kay Hian.
On other hand, UOB Kay Hian said that Petronas’ focus on downstream/D&P activities could be a silver lining on the O&G sector.
“This will anchor some defensive prospects to D&P/mid-to-downstream companies namely floating production storage and offloading players (Bumi Armada, Yinson), crude tankers and shipping companies (ie MISC), onshore storage/tank terminal operators (ie Dialog) and enhanced oil recovery/improved oil recovery solution providers that help boost production (Deleum, Uzma).
“This also includes Petronas’ Refined and Petrochemical Integrated Development beneficiaries,” said UOB Kay Hian.
Peer comparison:
StockStalk: Although there are a few positives, the overall outlook is still grim for the O&G industry.
The decision by Opec not to cut output, clamoured by many oil-producing nations, is expected to further dampen oil prices that have already reached record lows. Iran’s reentry into the world market next year will further exacerbate the glut and possibly worsen an already gloomy forecast for the oil industry in 2016.
On the local front, companies that have a high dependency on Petronas for projects are at most risk.
Nevertheless, there are some bright spots that potential investors could look out for, such as Petronas’ growth in the downstream segment. This may provide opportunities to local companies that have a strong focus in these areas and present decent long-term picks for bargain hunters.
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Important Note and Disclaimer: This article should NOT be taken as a cue to either buy or sell any stocks. The intention is to highlight the key factors you might want to think about before plunging in or scrambling out. While KINIBIZ makes every endeavour to ensure facts are right and opinion is fair, no liability can be assumed for anyone relying on this information. In other words let the buyer (or seller) beware — a reflection of Bursa Malaysia, we say.
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