Oil - Service, Equipment, Pipelines etc

[winston]

DJ A Case for Buying the Malaysia Oil and Gas Sector -- Market Talk

[Dow Jones] UOB Kay Hian keeps Malaysia's oil and gas stocks at overweight, citing earnings visibilities and "pockets of opportunities" for new contracts.

The house has SapuraKencana Petroleum (5218.KU) and Barakah Offshore Petroleum (7251.KU) as its top picks.

"We prefer offshore contractors with strong order books and offshore asset owners who are less geared and have high margins as buffers during challenging times," UOB says.

The house notes that most Malaysian oil and gas service providers are trading below the valuations of regional peers valuations.

"We prefer offshore contractors as most of the local offshore contractors have two-three years' earnings visibility via strong order books," it adds.

SapuraKencana is flat at 3.09 ringgit while Barakah is down 0.8% at 1.22 ringgit.


Source: Dow Jones Newswires

[winston]

Malaysia: ‘Buy O&G stocks now’
19 November 2014

KUALA LUMPUR: It is not all doom and gloom for oil and gas (O&G) stocks, which have been hard hit by the steep dip in global oil prices.

According to Aberdeen Asset Management Sdn Bhd, now is the perfect time to buy O&G stocks.

“We have seen a number of O&G companies that have consistently displayed sound business plans and growth projection but were unable to tap them as their shares were too expensive,” said Abderdeen Islamic Asset Management Sdn Bhd chief executive officer Gerald Ambrose during a media briefing, here, yesterday.

“But because of the weak oil price, many of the O&G stocks’ (prices) have come down. From a long-term investor point of view, weak oil prices give us the opportunity to buy stocks at valuations that we like,” he said.

Aberdeen remains bearish on the outlook of the ringgit and the Malaysian government bond market next year.

“We expect the United States Federal Reserve to raise the rates at its next meeting and if that happens, the US dollar will be stronger in 2015 and by default, other currencies, including the ringgit, will be bearish,” said Aberdeen Islamic’s assistant investment manager, Edmund Goh.

On the bond market, he said: “When the Fed raises the rates next year, it will trigger more outflows from the market and valuations will correct themselves, but (this) really depends on the magnitude of the correction itself.”

Strong local savings will, however, serve as a buffer against fund outflows, he added.

Source: NST

[winston]

Rig rates tumble

PETALING JAYA: An oversupply and price war are pushing down drilling rig rates in the oil and gas (O&G) industry around the world, which could impact the earnings of some local players.

Already, one of the biggest casualties of this development is Seadrill Ltd, the world’s largest O&G rig operator. On Wednesday, Seadrill posted a 40% drop for its third-quarter net profits and suspended its dividend payment. The last time it halted the payment was in Nov 2009.

Seadrill major shareholder Jon Frederickesen was reported to have said that the decision to suspend the dividend was taken after considering the significant deterioration in the offshore drilling and financing markets over the past quarter.

A combination of falling oil prices and new supply of rigs coming into the market next year is further exacerbating the situation for rig owners.

Oil prices are down some 30% this year, with Brent and WTI crude trading at about US$78 and US$74 a barrel respectively.

“With about 25% of the global ultra-deepwater fleet available in 2015, certain rig owners seem willing to work at or close to cashflow break-even rates and we expect this type of activity to continue in the short-term,” Seadrill said on Wednesday.

The company posted a diluted earnings per share (EPS) of 31 US cents from 60 US cents a year ago. The consensus estimate from Thomson Reuters called for an EPS of 67 US cents.

Its share price plunged 23% on Wednesday to US$15.99 a share, a new 52-week low.

Rig rates hit their peak at US$650,000 per day in 2013 for top specification deepwater units. Today, rates are below US$400,000 per day and could go lower as players continue to outbid one another in their attempts to maintain market share.

In March this year, Petroliam Nasional Bhd (Petronas) president and chief executive Tan Sri Shamsul Azhar Abbas had warned service providers of falling charter rates for O&G assets.

However, some analyst remained optimistic for Malaysian O&G companies as they felt Petronas was committed to its capital expenditure.

MIDF Investment Research O&G analyst Aaron Tan added that Malaysian O&G players were slightly sheltered as Petronas was still committed to its capital expenditure and was looking to increase oil production from 580,000 barrels a day to 600,000 barrels a day.

“Therefore, the activities must continue. The refurbishments and works will go on,” said Tan.

In Malaysia, rig operators include UMW Oil & Gas Holdings Bhd, SapuraKencana Petroleum Bhd and Perisai Petroleum Bhd. While SapuraKencana owns tender rigs, UMW Oil & Gas and Perisai own jack-up rigs.

Last year, SapuraKencana purchased Seadrill’s tender rig operations for US$2.9bil (RM9.3bil), thus making it the world’s largest operator of tender rigs with a global market share of 51%. Seadrill owns an 8.18% stake in SapuraKencana.

Apart from building up its asset base, the purchase of the Seadrill tender rigs was also to eliminate “conflict of interest” position that had emerged in SapuraKencana following its merger in 2012.

On the global front though, Seadrill said it was not convinced the market would revive in the next 18 to 24 months, with next year likely to be worse than this year and that meant recovery was more likely in 2017.

In an extensive report on the O&G sector, UOBKayHian said SapuraKencana is one of the companies that could be vulnerable, given that “drilling rig charter rates could soften amid overcapacity”.

The report also pointed out that globally, O&G stock prices had collapsed by some 30% to 50% in the last two months on falling oil prices.

Nevertheless, the report was positive on the Asian O&G scene, noting that production was in shallow and midwater areas and that the breakeven cost of production is around the US$30 to US$40 per barrel in terms of Brent oil price.

“Asia’s spending is driven by national oil companies (NOCs) instead of international oil companies (IOCs). NOCs’ goal is to maintain/achieve self-sufficiency while IOCs maximise profits and shareholder returns. Thus, NOCs’ spending is typically more resilient than that of IOCs. As a whole, Asia accounts for 33% of global oil demand but only 9% of production.”

MIDF’s Tan concurred and remained positive on the O&G sector mainly because of Petronas.

“Go for stocks with big order-books and long tenures in diversified geographic locations. In SapuraKencana’s case, it has an orderbook of RM26.8bil up to 2020. That’s definitely quite safe,” he said.

UOBKayHian said in its report: “While stock valuations are undemanding, fund managers await a clearer direction in oil prices as they are wary of catching falling knives. Some fund managers concurred that by the time there is clarity, stock prices would have passed their bottom.”

Source: The Star

[winston]

Offshore drillers hit new lows… Seadrill Limited, Transocean, and North Atlantic Drilling Limited hit new 52-week lows.

[winston]

Malaysia: Petronas cuts capex

http://www.thestar.com.my/Business/Busi ... ?style=biz

[winston]

Malaysia: UOB Kay Hian Research retains Overweight on oil, gas stocks

KUALA LUMPUR: UOB Kay Hian Malaysia Research is maintaining its Overweight recommendation on the Malaysian oil and gas sector with Bumi Armada, Barakah Offshore Petroleum and Deleum as its compelling stocks.

It said on Tuesday crude oil prices – which had fallen to below US$60 a barrel from a high of US$100 in July -- would eventually recover over the medium term.

The research house said following up after Petronas president and chief executive Tan Sri Shamsul Azhar Abbas that the national oil corporation will likely cut capex by 15%-20%, most companies under its coverage continue to be relatively sanguine on their prospects, given their higher reliance on brownfield and less dependence on capex (that is, project initiations) spending.

UOB Kay Hian Research also pointed out Petronas also highlighted that the “new era’ for oil in the near term could be at US$70-US$75, at least until end-2015.

“We reiterate our view that while the outlook looks negative in the near term, and take note that selected OPEC members and industry experts have expressed a likely floor level for Brent of US$60 to US$70 for a while in order to have stability in the years ahead at US$80+, there are still pockets of opportunities in the sector as the Petronas would still invest in operations and maintenance (O&M) and E&P to sustain domestic O&G production,” it said.

UOB Kay Hian Research refined its trough earnings/valuation to be more stringent, using a sector average during the 2009 global financial crisis and assume notional sustainable earnings - a percentage of (ranges between 50%-75%, depending on the business model) that companies can realistically
(100% probability for this bit) meet versus its 2016 earnings forecast and attach a 40%-60% probability for the remaining earnings.


“Stock differentiation has become even more crucial. We continue to advocate a bottom-up strategy that favours companies with:
a) an experienced and dynamic management,
b) a resilient business positioned in regional shallow and mid-water depths or a cabotage market that has high barriers to entry,
c) clearly-defined company-driven growth,
d) good profit margins to cushion a potential industry downturn,
e) cash calls that are strategic and EPS-accretive, and
f) a healthy ROE.

We believe investors will return to stocks that deliver earnings growth amid lower oil prices,” it said.

Key themes that support its investment thesis, include:
a) Petronas would still invest in exploration & production (E&P) activities to beef up domestic production,
b) more enhanced oil recovery (EOR) initiatives, and
c) the development of RAPID and its associated facilities costing US$27b in total to be intact, especially those in which final investment decision (FID) are made.

Key changes to our target price and earnings estimate, include:
a) downgrade in earnings – SapuraKencana, Dialog, Uzma and Barakah, and
b) downgrade in valuation for prudence – SapuraKencana, Bumi Armada, MMHE, Dialog, Yinson, Uzma, Deleum and Barakah while no changes were made towards MISC and Perisai.

Source: The Star

[winston]

More than $150 bln of oil projects face the axe in 2015

LONDON: Global oil and gas exploration projects worth more than $150 billion are likely to be put on hold next year, as plunging oil prices render them uneconomic, data shows, potentially curbing supplies by the end of the decade.

As big oil fields that were discovered decades ago begin to deplete, oil companies are trying to access more complex and hard to reach fields located in some cases deep under sea level. But at the same time, the cost of production has risen sharply given the rising cost of raw materials and the need for expensive new technology to reach the oil.

Now the outlook for onshore and offshore developments - from the Barents Sea to the Gulf or Mexico - looks as uncertain as the price of oil, which has plunged by 40 percent in the last five months to around $70 a barrel.

Next year companies will make final investment decisions (FIDs) on a total of 800 oil and gas projects worth $500 billion and totalling nearly 60 billion barrels of oil equivalent, according to data from Norwegian consultancy Rystad Energy.

But with analysts forecasting oil to average $82.50 a barrel next year, around one third of the spending, or a fifth of the volume, is unlikely to be approved, head of analysis at Rystad Energy Per Magnus Nysveen said.

"At $70 a barrel, half of the overall volumes are at risk," he said.

Around one third of the projects scheduled for FID in 2015 are so-called unconventional, where oil and gas are extracted using horizontal drilling, in what is known as fracking, or mining.

Of those 20 billion barrels, around half are located in Canada's oil sands and Venezuela's tar sands, according to Nysveen.

ASSESSING THE ECONOMICS

Geographically, the projects on the balance are widespread.

Chevron's North Sea Rosebank project is among those with a shaky future and a decision on whether to go ahead with it will likely be pushed late into 2015 as the company assesses its economics, analysts said.

"This project was not deemed economic at $100 a barrel so at current levels it is clearly a no-go," said Bertrand Hodée, research analyst at Paris-Based Raymond James. He estimates a development cost of $10 billion for Rosebank, with potential reserves of 300 million barrels - meaning the Chevron would only recoup $33 a barrel.

Even with oil at $120 a barrel, the economics of some projects around the world were in doubt as development costs soared in recent years. Chevron's Rosebank project has already been delayed for several years.

In response to a question from Reuters, the company said "the Rosebank project is in the Front End Engineering and Design phase. The review of the economics and the additional engineering work is progressing... It is premature to make any statements on an FID date."

Hodée said any offshore project with a development cost above $30 a barrel would most likely be put on hold in current oil prices.

Norway's Statoil this week said it had postponed until next October -- a six-month delay -- a decision to invest $5.74 billion in the Snorre field in the Norwegian Sea as its profitability was under threat.

New oil fields typically require four to five years to be developed and billions before the first drop of oil is produced.

Any cutbacks in oil production bodes ill for international oil companies that are already struggling to replace depleting reserves as exploration becomes harder and discoveries smaller. It also points to tighter supplies by the end of the decade.

LEAST LIKELY

Projects in Canada's oil sands, which require expensive and complex extraction techniques, are the most unlikely to go ahead given their high investment requirements and relatively slow returns. Total recently decided to postpone the FID on the Joslyn project in Alberta, the cost of which Hodée estimated at $11 billion.

Shell's liquefied natural gas (LNG) project in Canada's British Columbia, already under pressure from a looming supply surge, faces further strain in the current price environment, analysts said. According to research by Citi, the project requires oil at $80 a barrel to break even.

Royal Dutch Shell's chief financial officer Henry Simon indicated in October that it was "less likely" to go ahead with unconventional projects in West Canada if oil falls below $80 a barrel.

Asked by Reuters what the company's current thinking was, a Shell spokesman would not comment on "internal decision-making."

Even in the Gulf of Mexico, one of the most attractive oil production areas in the world, projects are facing challenges.

BP last year put on hold a decision on its Mad Dog Phase 2 deep water project in the Gulf of Mexico after its development costs ballooned to $20 billion and the oil major is now expected to further delay an investment on the field's development.

"BP were talking positively about bringing it back, but now it may be put on hold," BMO Capital Markets analyst Iain Reid said.

BP's chief financial officer Brian Gilvary however said in an analysts briefing in October that he expected Mad Dog Phase 2 to be sanctioned in the first quarter of 2015.

Statoil's Johan Castberg field in the Barents Sea, which was expected to get its FID in 2015, seems unlikely to get the go-ahead at the moment given it has an estimated project cost of $16-$19 billion, Hodée said.

Statoil said that the final project design is due in the summer of 2015. Its giant Johan Sverdrup field in the North Sea is still on track for development with a price tag of $32.5 billion.

Source: Reuters

[winston]

Fund managers rethink strategies

Fund managers’ strategies on oil and gas related stocks are varied amid a weak crude oil price trend, although they say that the impact on their portfolios thus far has not been major.

Some have already made certain changes to their portfolios, switching to stocks from other sectors and taking a hit, some are holding onto their investments.

There is also the mix strategy of waiting for good buys in anticipation of more dips and considering exits from their oil and gas exposure if the crude oil turmoil shows no signs of abating.

Of course, their decisions also vary from market to market.

Notably, the Malaysian market is among the worst stock-market performers in the region year-to-date, down more than 6%.

As a contrast, China markets are up 30% on average.

Lower energy costs is generally favourable to equities but the Malaysian market is an exception due to the much favoured oil and gas sector here, points out Thomas Yong, chief executive officer at fund management firm Fortress Capital.

Lower revenue from the country’s oil and gas exports because of the decline in price has raised questions on the Government’s ability to fund its fiscal budget and the recent weakness of the ringgit serves to exacerbate concerns of foreign investors, he notes.

Still, most fund managers surveyed say impact has been minimal on their respective portfolios.

Switching stocks

“Generally, our portfolios have declined about 6.5% in value since oil started to come down drastically in June,” says Danny Wong, fund manager at Areca Capital which invests mostly in the Malaysian market.

The impact is rather minimal since we were underweight on the bigger local oil and gas firms for their high valuations since the second quarter, we focused on the mid-small cap service-oriented players, he says.

“As a tactical move, we are switching from one oil and gas stock to another just to keep the beta low.”

Wong says Areca has also switched to stocks from other sectors like insurance and utilities since the rapid decline of crude.

He feels that amid the current oversupply of crude globally which is the main reason for the fall in the price, demand for the commodity will not be an issue, moving forward in line with increasing population and wealth especially in high-growth countries like China, Indonesia and India.

Wong also points out that alternative energy is rather costly and capital intensive and therefore, not able to be a major threat over the next few years.

“We’re now looking at some over-sold high beta local names.”

“We have seen many cycles and this round it is not a crisis, recession nor is it due to geo-political issues.”

He believes what’s happening is temporary and “the dust will settle”.

“As a long term investor, I will take advantage of the market movements as per the famous quote - buy when there is blood running on the streets, but be cautious and do your homework.”

Mulling over an exit

Capital Dynamics founder and managing director Tan Teng Boo, who manages about RM1bil worth in global funds, may exit the one overseas oil and gas investment that his house has while for the other overseas alternate energy stock that it is invested in, he says that although its price has fallen sharply, “we are still recording profits and holding on to it for the longer term.”

For its global funds, Capital Dynamics’ main exposures are to the London and Hong Kong stock markets.

As for his Malaysian investments, Tan, well-known for his value-investing strategies, says there is no exposure to the oil and gas sector whatsoever.

“We have zero cut-loss here and are cash-rich, we are watching but not buying yet.”

Tan has been bearish on markets since the end of last year and warns that there is more downside to come, stemming mainly from the rich valuations in the local market, the New York Stock Exchange and NASDAQ, to name a few.

“Reinforcing our worries is a US monetary policy that is highly opaque and confusing and where the Federal Reserve keeps shifting its monetary goal posts.”

“Overall, the fall in oil price has very limited impact on us as our cash levels for both our local and global funds are very high.”

Holding on

For Fortress Capital’s Yong, holding on to its oil and gas investments is the strategy for now.

Yong, who co-founded the fund management firm which invests in regional stocks, says it has less than 5% exposure to the sector, largely in Singapore.

“As our current positions are in large and financially resilient oil and gas operators trading at single digit forward earnings, we are inclined towards holding onto our existing positions, he says.

New positions in the sector will be added only with better crude oil price visibility, Yong says, adding that his portfolios currently comprise mainly of China banks.

“While prices in Singapore have not been spared, the impact is significantly muted because of the much lower valuation levels there and our smaller position.”

He says the Malaysian oil and gas industry has for the large part of the year been the most favoured sector domestically due to Petronas’ large outsourcing expenditure.

“The equity prices in this sector had performed strongly and as a result our interests had shifted to other sectors.”

Like Wong, he opines that although supply conditions of oil and gas have shifted as a result of US’ and Canada’s expanded oil supply from shale gas, other global demand supply conditions and the costs of production have not dramatically changed.

“Assumptions based on these factors easily justify eventual recovery above US$80 per barrel for Brent.

“What investors really need to brace for is the increased volatility of prices going forward.”

Gerald Ambrose, managing director of Aberdeen Asset Management, declines to elaborate on what kind of an impact declining crude has had on the fund management house’s investments.

“Our strategy remains the same, buy well-managed stocks at the right price, in fact, some of the oil and gas stocks are at attractive valuations already.”

Buying into niche companies

Meanwhile, in his most recent blog posting, emerging market guru and the executive chairman of Templeton Emerging Markets Group Mark Mobious offers some consolation in the wake of the current crude oil saga, noting that some oil fields in Malaysia have “very low cost” (of production) , at well below US$50 per barrel.

“Therefore, lower oil prices don’t necessarily mean companies in the sector will be unprofitable,” he writes in the Dec 3 posting.

The 78-year-old Mobius who spends a good part of his working life travelling to emerging markets to discover economic potential says it is important to stock-pick in Malaysia, where valuations have been higher than in some other Asian markets ,while at the same time, performance has generally been somewhat disappointing.

He advocates buying into the utility and consumer sectors to ride on Malaysia’s long-term goal of becoming a high-income country but warns of a few bumps that could impact this vision.

“As investors, we have to maintain a long-term view and focus on companies we feel can survive and proposer amid changing conditions, and that fill an interesting niche.”

Mobius says Templeton also looks out for companies that have the potential to serve consumers not only in Malaysia but throughout the region, and even globally.

The price of Brent crude, the global benchmark has collapsed to below US$70 per barrel, the lowest in four years and is about 37% down since the beginning of the year.

The drastic drop, made worse by The Organization of Petroleum Exporting Countries’ recent decision to not slash production has had chain effects, including affecting other commodity and currency markets worldwide.

No one knows for sure when prices will stabilise again but some analysts are predicting that they will go down by another 10% to 15% by the end of the year amid weakening global economies.

Some of the oil and gas stocks on Bursa Malaysia that have been beaten down in the past three months include SapuraKencana Petroleum Bhd, Bumi Armada Bhd and Dialog Group Bhd which are trading about 50%, 143% and 31% off their respective 52-week peak prices.

Source: The Star

[behappyalways]

Falling oil prices threaten to transform the industry
http://www.bbc.com/news/business-30393690

[behappyalways]

No safe harbor: All offshore players now at risk as oil price rout intensifies
http://sbr.com.sg/shipping-marine/news/ ... ntensifies