ALTHOUGH the outlook for oil price has become uncertain due to emergence of the new Omicron COVID-19 variant, TA Securities Research is retaining its “overweight” stance on the sector as current elevated oil price is impetus for PETRONAS and other oil companies to ramp up their capex spending.
To re-cap, Reuters reported that OPEC+ has postponed its technical meetings to early December on the back of the Omicron ‘breakout’ to enable more time to assess the impact of the coronavirus variant on oil demand and prices.
“In particular, we expect PETRONAS to focus on brownfield gas developments in these areas: (i) expansion projects; (ii) well drilling, (iii) production enhancement, and (iv) platform and facilities maintenance,” projected analyst Kylie Chan Sze Zan in an oil & gas (O&G) sector update.
“As a result, demand will recover for offshore fleet and services. In turn, this would catalyse a rebound in daily charter rates (DCR), fleet utilisation and new contract awards.”
Moreover, increased O&G production from OPEC+ and other countries will translate to higher demand for crude and LNG transportation. As such, this also translates to higher DCR for oil tankers and liquefied natural gas (LNG) carriers.
“Lastly, as COVID-19 restrictions are gradually uplifted, this will enable accelerated progress on O&G projects and revival of delayed O&G capex plans,” reckoned TA Securities Research.
However, TA Securities Research caveated that earnings risks are inevitable for some industry players.
“For Lotte Chemicals Titan Holding Bhd, we raise its FY2022 effective tax rate to 19% (previous: 17%) to account for the impact of cukai makmur (windfall tax).
“As a result, our FY2022 forecasts are reduced by 3%. Additionally, we lower its valuation to 3.5 times EV/EBITDA (enterprise value/ earnings before interest, taxes, depreciation, and amortization) (previous: 4x) to align with its naphtha-based peers that have recently de-rated by circa 0.5 times.”
Meanwhile, RHB Research expects PETRONAS’ capex to pick up further quarter-on-quarter (qoq) in 4Q 2021 but the national oil company’s full-year capex could potentially land below the targeted RM39-RM40 bil mark.
“The domestic upstream space, in our view, will benefit from the 60% allocation of the RM20 bil annual upstream capex for 2022-2027 (vs 9M 2021’s RM9.4 bil),” opined analyst Sean Lim.
PETRONAS returned to the black with a net profit of RM35.2 bil from a RM19.9 bil loss in 9M 2020. To meet its RM25 bil dividend target, the remaining RM9 bil is expected to be paid out by 4Q 2021.
Moreover, PETRONAS’ net cash continued to strengthen (+7% qoq) to RM64 bil, underpinned by stronger operating cash flow (+19% qoq).
In view of uncertainties posed by Omicron and in response to the US’ strategic petroleum reserve (SPR) crude oil release, RHB Research said it is not surprised if OPEC+ is slowing down its production ramp-up schedule of adding 400,000 barrels/day of production per month.
“Our 2021-2022F crude oil prices are maintained at US$71.00 (4Q 2021’s at US$80/barrel) and US$69/barrel while the long-term oil price forecast remains unchanged at US$60/barrel. Downside risks to our sector call are weaker oil prices and demand as well as lower spending by clients.” – Dec 1, 2021
