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Thursday, April 19, 2018

RHB says oil and gas sector to recover

Bernama / Bernama
April 18, 2018 13:12 pm +08

KUALA LUMPUR (April 18): The oil and gas (O&G) sector is likely to see a recovery on all fronts this year, having seen its earnings trough in 2017, said RHB Research Institute.

In its strategy note focusing on Malaysia, the research firm said signs of recovery were seen in the sector, especially for upstream services players such Malaysia Marine and Heavy Engineering Holdings Bhd and Sapura Energy Bhd.

Downstream-related companies including Petronas Chemicals Group Bhd and Petron Malaysia came above expectations on the back of stronger refining and petrochemical spreads.

"Overall, we believe the market has seen its worse showing in 2017 and, moving forward, a recovery in earnings would be seen," said RHB Research.

It added that the national oil firm, Petronas had also painted a stronger outlook for the local O&G industry, with its maintenance activities in particular expected to be ramped up.

The research firm pointed out that demand for upstream service assets is likely to be stronger, although some players would still be in the red.

Post the RM4 billion maintenance, construction and modification contract award by Petronas, RHB Research believed there were more to be awarded for the 11 other production-sharing contracts (PSCs) under this umbrella maintenance deal.

"This is because it has been close to four years since the previous cycle. We are also positive on some upstream services players, especially Sapura Energy, on the grounds of more contract awards anticipated in 2018 as Petronas and other PSCs ramp up their capital expenditure spends gradually.

"Locally, we believe more gas production projects would be sanctioned vis-à-vis oil projects, on the back of more stable gas prices," it said.

RHB Research has maintained its “overweight” call on the sector, saying some O&G players are expected to record profits from losses on higher work orders, while others are likely to see lower losses year-on-year on increased assets utilisation despite lower charter rates.

It said Petrochemical spreads are also expected to remain strong in 2018 on the back of sustained turnaround activities for facilities in the region.

Incoming facilities’ capacity additions from the Middle East and the Petrochemical Integrated Development project at Pengerang, Johor, as well as capacity expansions are largely in the years beyond 2020 and therefore, product spreads should be intact over the next two years, said the research firm.

Globally, RHB Research has maintained its forecast for Brent oil prices at US$64 per barrel in 2018, which is higher by 16% year-on-year from US$54.80 per barrel last year, as well as US$60 per barrel for 2019 and 2020.

"We have assumed that OPEC and non-OPEC countries would maintain their 1.8 million barrels per day cut throughout 2018. For 2019 and beyond, there is still uncertainty on the extension of the production cut in addition to continued growth in US shale oil production," it added.

US shale oil production growth is not expected to lose steam in the foreseeable future, as advancements in fracking technology have brought down production costs to be viable at current levels.

Meanwhile, RHB Research said offsetting factors included escalating geopolitical tensions, rising demand from continued global economic growth, and the uncertainty of supply from Venezuela.

In late March, the price of crude oil climbed to a fresh high of US$70.45 per barrel, the highest level since January 2018, on rising geopolitical risks following key appointments in US President Donald Trump's administration.

Trump has appointed John Bolton as the US national security adviser, Mike Pompeo as US secretary of state, and Gina Haspel as chief of the US intelligence agency, the Central Intelligence Agency — all of whom are considered to be Iran and North Korean hawks.

"We note that Iran currently exports two million barrels per day (mpbd) out of 3.8 mbpd in production. During the last round of sanctions, Iran was shut out of European markets and able to export only to Asia, at one mbpd.

"Any unilateral US sanctions against Iran could potentially disrupt around 250-500 thousand barrels per day (kbpd) of global oil supply, in our view," said RHB Research.

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