Risk of Petronas capex cut if low oil prices prolonged: Affin Hwang

PETALING JAYA: Affin Hwang Capital sees the risk of Petronas cutting capital expenditure (capex) in a prolonged low oil price environment.

However, it believes Petronas is in a much better position to ride out another down cycle, cushioned by its large cash pile of RM142 billion.

With the current oil price volatility and demand and supply outlook, the research house remains cautious on Malaysia’s oil & gas sector while maintaining the “underweight” stance.

“Based on our recent channel checks with industry players, there are not many signs of Petronas delaying its 2020 work programme. However, we gather that downward revision in capex spending, rates, and work activities tend to have a six-month lag,” it said in a research note.

If the low oil price environment prolongs, Affin Hwang said offshore support vessels and jack up players are both at risk in terms of their daily charter rates.

It said the oil market has had its worst luck in the first quarter (Q1) of the year underpinned by softer demand due to the Covid-19 outbreak which is compounded by Opec and Russia failing to reach an agreement on potential supply cuts.

“With no signs of a compromise possibly until June 2020, we see risk of a slower contract roll out, even for potential beneficiaries from Petronas’ activity outlook.”

In Q1, total contract value announced as of March 20 stood at RM3.6 billion, inclusive of RM2.2 billion P2 Shuttle Tankers awarded to MISC by Petrobras.

Excluding that contract, the contract value came in lower at RM1.5 billion as compared to RM3.2 billion in 1Q19.

During a down cycle, Affin Hwang expects small-mid cap companies to trade in the range of 6-8 times one-year forward price-to-earnings ratio (PER), while mid cap spaces would trade closer to 10-12 times forward PER.

Moving forward, the research house opined that an industry wide capex cut is inevitable with some global oil majors trimming their 2020 capex by 23% over the past couple of weeks following the crash in global oil prices.

It expects Brent oil price to trade in the range of US$45-50 a barrel in 2H20 with a full-year assumption of US$45 a barrel. For 2021, the price is projected to edge higher at US$50-55 a barrel.

source https://www.thesundaily.my/business/risk-of-petronas-capex-cut-if-low-oil-prices-prolonged-affin-hwang-FB2175777