WHILE PETRONAS has posted its best quarterly results in a decade for its 1Q 2022, it should be noted that oil price ascent may decelerate in 2H 2022 due to inventory build-up.
In this regard, TA Securities Research has identified the following dampeners that may hinder the ascent of oil price:
- Additional release of strategic oil reserves from the US and IEA (International Energy Agency) member nations;
- Oil demand may collapse under inflationary pressures;
- Potential relaxation of Venezuelan oil sanctions could add 400,000 barrels of oil to global supplies, and
- Potential inventory builds in 2H 2022.
“The EIA (the US Energy Information Administration) estimates that OECD inventories in April were 315 million barrels below their five-year (2017-2021) April average. This translates to its lowest level based on historical data that stretches back to 2004,” cautioned analyst Kylie Chan Sze Zan in an oil & gas (O&G) sector outlook.
“Nevertheless, in 2H 2022, EIA expect some degree of build-up in global oil inventories. Hence, this may result in OECD inventories recovering back to its five-year average. Thus, this will provide some downward pressure to oil price in 2H 2022.”
Yesterday (May 31), PETRONAS revealed that its 1Q 2022 core net profit surged 83% year-on-year (yoy) to RM20.5 bil – the highest since 1Q 2012 (RM20.9 bil on the back of average Brent oil price of US$118/barrel).
The sterling results were largely driven by its upstream segment following the spike in average Brent price to US$102/barrel (1Q 2021: US$61/barrel) and average JCC (Japanese Customs Cleared crude oil) price to US$99/barrel (1Q 2021: US$56/barrel).
Moreover, the results were boosted by (i) weaker ringgit/US$ exchange rate of RM4.19 (1Q 2021: RM4.07); and (ii) improved refining and petrochemical margins in-line with strong prices for downstream products.
The above more than offset (i) higher product costs at the gas and upstream segment; and (ii) higher taxation.
Nevertheless, TA Securities Research retained its “overweight” stance on the O&G sector against the current backdrop of high oil prices, particularly on upstream service providers and petrochemical producers that have cheap feedstock supply.
“Additionally, we are upbeat on gas processing players, namely Coastal Contracts Bhd. This is given that gas is a relatively cleaner transition fuel that is currently in high demand,” noted the research house.
“We roll forward Coastal’s valuation base year to FY2023 which results in a higher sum-of-parts target price of RM2.59 (previouslu RM2).”
Elsewhere, TA Securities Research expects petrochemicals companies to continue benefiting from the current multi-year high product spreads. This is on the back of resilient product average selling price (ASP) anchored by oil price strength.
As for upstream contractors, it expects a rebound in daily charter rates (DCR), fleet utilisation and new contract awards.
“The catalyst is higher capex spend from PETRONAS for brownfields in these areas: (i) expansion projects, (ii) well drilling, (iii) production enhancement, and (iv) platform and facilities maintenance,” added the research house. — June 1, 2022
