The outlook for Malaysia’s oil and gas sector is improving– Affin Hwang
Affin Hwang Capital Research is seeing a positive outlook for the oil and gas sector in Malaysia.
“After the past few years of sailing on rough seas, we believe the backdrop of the Malaysian O&G sector has turned supportive. We see a few positive inflection points that have already started to materialise,” Affin Hwang Capital wrote in its report recently.
The brokerage noted that global oil majors’ capital expenditure were guided to be higher in 2018. It added that contract flows have also been picking up, which would translate into corporate earnings recovery.
On the macro front, Affin Hwang Capital said, the strong adherence to global production cut, and robust demand should continue to support oil prices.
“We reiterate our ‘overweight’ sector call, as we see more value emerging from the sector, driven by positive sentiment such as the stabilisation in global oil prices, more tenders/contracts roll out and less earnings disappointment,” it said.
Affin Hwang Capital revised upward its Brent crude oil price assumption to fall within the range of US$63 to US$68 per barrel, or an average of US$65 per barrel, for 2018. This compared with its earlier forecast of US$58 per barrel.
The brokerage’s long-term Brent crude oil price assumption stood at US$75 per barrel.
On the back of an increasingly positive sector outlook, Affin Hwang Capital pointed out that the aggregate contract value in 2017 for local O&G players jumped 35% year-on-year (y-o-y) to RM16.8bil from RM12.5bil in 2016.
In addition, the contracts value for the three months to March 2018 grew 2% y-o-y compared to the corresponding period last year after stripping out the most recent contract award of Pegaga CPP.
“Global oil majors’ have revised capex higher by an average 5% y-o-y in 2018, after cutting back by nearly half since 2014,” Affin Hwang Capital said.
“Based on higher Petronas (Petroliam Nasional Bhd) and oil majors’ capex, we believe contract flows will accelerate in 2018.
“Industry players have seen higher surveys and tender activities along some of the services value chain,” it added.
After three consecutive years of decline in Petronas’ capex spending, the national oil major raised its capex guidance to RM55bil in 2018, compared with RM50bil and RM45bil in 2016–2017, with RM26bil allocated for upstream development, higher than 2017.
Petronas planned to drill 110–120 wells and maintain exploration on 23–25 wells in Malaysia.
Affin Hwang Capital noted that O&G results from the recently concluded fourth quarter earnings season were commendable.
It said most O&G companies under its coverage reported earnings growth, led by its top pick
“Our sector core earnings growth, while not outstanding, came in at a modest 3.6% yoy in 2017, and is expected to post another 5.1% y-o-y growth in 2018. For the overall industry, consensus is expecting a sector earnings growth of 13.4% and 8.9% in 2018 and 2019, respectively,” Affin Hwang Capital explained.