Oil - Service, Equipment, Pipelines etc

[winston]

Malaysia: Is it time to take another look at oil and gas counters? By: INTAN FARHANA ZAINUL

SOME oil and gas stocks are seeing fresh investor interest this week on the back of global oil prices consolidating at about US$60 per barrel.

This is not surprising as the carnage of oil and gas stocks in the last three weeks has seen some counters trading at single-digit forward price-to-earnings ratio (P/E).

These include counters such as Wah Seong Corp Bhd, SapuraKencana Petroleum Bhd, Perdana Petroleum Bhd, Uzma Bhd and Alam Maritim Resources Bhd.

It is anyone’s guess whether oil prices will remain at current low levels or slide down further in the coming months.

“Personally, I think that US$50 per barrel is acceptable in investors’ minds now. If it goes below US$50, then that could be another reason to be fearful of O&G stocks,” says UOB KayHian analyst Danny Chan.

He opines that the decline in oil prices, which are 46% down year-to-date, have more or less been priced in for most O&G counters.

The global benchmark Brent was trading at US$60.45 yesterday while the US West Texas Intermediate (WTI) traded at US$55.02.

Chan notes that should oil prices stay low for a long time, available jobs would become fewer.

“Hence, there are very few chances for stocks to re-rate at 12 to 16 times P/E towards bull market kind of valuations,” he says.

However, he says there are pockets of opportunities for some companies, adding that Bumi Armada Bhd’s earnings visibility is quite good.

For small and medium-cap companies, he favours Deleum Bhd and Uzma Bhd as they fall within Petroliam Nasional Bhd’s (Petronas) operational expenditure coupled with strong balance sheet.

“We think these three companies will be quite resilient with their earnings,” he says.

Uzma’s share price fell 61.6% to RM1.59 yesterday from its peak of RM4.22 on July 7, 2014. Meanwhile, Deleum’s share price dropped 36% to RM1.68 from RM2.58 from its peak on April 4, 2014.

Chan adds that he is more concerned about SapuraKencana Petroleum Bhd as 10% to 15% of its earnings are directly exposed to exploration and production (E&P).

In addition, he says, it has relatively higher gearing of 1.3 times.

Maintaining a “tactical overweight” call on the O&G sector, he says that oil prices should firm up in winter.

However, based on conservative earnings assumption and trough analysis, UOB KayHian’s preferred picks are SapuraKencana, Bumi Armada, Barakah Offshore Petroleum Bhd, Uzma and Deleum.

SapuraKencana, Uzma, Deleum and Barakah Offshore are pegged at a trough P/E of eight times assuming at least 80% of its current 2015 and 2016 earnings are achievable.

Chan observes that contractors and service providers will have to readjust their business models and operations to cope with the current ‘survival of the fittest’ market.

This is because Petronas and international oil companies are moving to cut their E&P budgets and focusing on selected projects, thereby intensifying competition in businesses such as drilling rigs, offshore support vessels and fabrication.

“Within the O&G value chain, we have least preference for engineering, procurement and construction (EPC) contractors (fabricators), offshore support vessel owners especially heavily-geared ones and drilling rig owners (especially those exposed to exploration drilling),” he says.

In a risk assessment exercise conducted by UOB KayHian, it found that offshore contractor SapuraKencana had the lowest average score (5.0 out of 10) despite its high earnings sustainability and attractive valuations.

This was because it had low balance sheet strength and high foreign shareholding.

Meanwhile, Deleum scored the highest (7.6 out of 10) due to its high earnings sustainability, strong balance sheet, high valuation attractiveness and low foreign shareholding.

UOB KayHian, which assessed 10 stocks under its coverage, looked at four key considerations, namely three-year earnings sustainability, balance sheet strength, valuation vis-a-vis regional peers and foreign shareholding.

Perisai Petroleum Teknologi Bhd scored 5.4, with low earnings sustainability, low balance sheet strength and moderate foreign shareholding.

Interestingly, it was rated high for valuation attractiveness despite its earnings being dragged down by two of its currently idle assets, the Rubicone and derrick pipe-lay barge, Enterprise 3.

Chan says the high rating is because Perisai stands to enjoy quite a big earnings swing if the two assets manage to secure charters.

“It’s attractive because returns will be substantial but it’s a bit of gamble if they don’t get the contracts next year. However, management has indicated it is quite hopeful that a contract will be secured in the first quarter of next year,” he says.

He says that it is surprising to observe that Malaysia’s O&G counters are no longer trading at a premium to regional peers, as they normally trade at around 15% to 20% premium.

“But in the current oil crash, the premium has been wiped out. Additionally, some counters are trading at discounted valuations to regional peers,” he says.

Another analyst noted that with oil prices being so uncertain at this juncture, it was very difficult to say whether investors should be accumulating significantly.

She says that Petronas has given a clear indication that its capex will be lower in 2015, implying that new contract flow will be less robust than in the past two years.

She says there was a record amount of contracts awarded in the past two years and expects it to fizzle out in 2015 except for the Pengerang Refinery and Petrochemical Integrated Development (Rapid) project.

“Besides the smaller quantity of contracts, there will also be an emphasis on costs, therefore recipients of new contracts may not be as profitable as they were previously,” she says.

She notes that if oil production companies are cutting back on capital expenditure, one of the first few items to cut or delay are big ticket items such as new fabrication and FPSO contracts.

She says new exploration plans in the deepwater areas could also be pushed back and this would affect deepwater rigs.

“In the offshore asset market, drilling rig owners and offshore support vessel (OSV) owners are also hit because of less offshore activity and because oil production companies look to cutting costs,” she says, adding that one of the ways is to push down charter rates for assets like OSVs.

The analyst says that if crude remains stable, she sees a quiet first half for 2015, with slow offshore contract activity.

Companies with firm order books are expected to report earnings within expectations while those without will see a sharp drop in earnings.

However, she says that if crude declines further, it should be a temporary situation.

“This is because there will be a drop in supplies with crude dipping below break-even costs of many producers. The lower supply will push crude oil prices upwards back to equilibrium,” she says.

Source: The Star

[winston]

Malaysia: After slashing capex, Petronas plans up to 30% cut in opex

PETALING JAYA: Petroliam Nasional Bhd (Petronas) is looking to make cuts in its operating expenditure (opex) by between 25% and 30% to preserve its profitablity as crude oil prices continue to tumble.

Sources said that the national oil company was reviewing its spending and was in the process of identifying where cuts could be made. Projects it has committed to from last year and in its budget are likely to continue.

Oil company executives said word was starting to filter to them that cuts in opex would be made as the price of crude oil continues to fall. As the price of Brent crude oil was falling and at US$70 a barrel late November last year, Petronas said it would slash its capital expenditure (capex) up to 15% this year.

With the price of global crude oil now at around US$50 a barrel, more oil majors have announced cuts in not only capex but also their opex, which includes payroll.

One executive said the drop in crude oil prices had been worse than what many in the industry had imagined and that it would have a ripple effect throughout the entire supply chain.

“We are expecting operating and capital expenditure cuts by Petronas and are starting to make adjustments,” he said. The oil and gas industry had focused on production as prices remained high and often neglected the cost management side of the business.

That is changing and executives said the first effects from cuts were being seen in exploration and production (E&P) activity.

Moody’s Investors Service said in a report yesterday that the plunge in crude oil prices would reduce E&P activity and raised the risk for oilfield service (OFS) companies.

“Lower oil prices will directly reduce cashflow in 2015 for E&P companies, which will try to offset the shortfall by reducing their capital investments, reducing earnings for OFS companies as activity drops and E&P customers negotiate lower prices,” Moody’s said.

Oil majors around the world have started to slash their spending and jobs are already being lost as a result of plunging crude oil prices.

Giants such as BP will cut thousands of jobs at a cost of US$1bil and for the companies in Malaysia, the fear is that job cuts may be next.

The price of West Texas Intermediate (WTI) crude oil was at around US$48 a barrel at press time yesterday. The price of Brent was slightly higher at around US$51 a barrel.

Industry officials fear Petronas will flex its muscle to ensure cuts are carried out should it deem necessary.

The officials said clauses in contracts with Petronas tended to give the national oil firm leeway to make changes in the terms of service with the private companies it dealt with.

“Development projects that Petronas has committed to are expected to continue but there will be changes in how they consume services. And there will not be many companies that are going to challenge Petronas even as it makes changes to the services it uses,” said one oil company executive.

But some feel that risk may not materialise.

An oil and gas analyst said that when Petronas gave out contracts, there were clauses which stated that Petronas could scale back what had been given out depending on certain conditions.

“So yes, the service providers are at the mercy of the vendor. Petronas has never exercised that clause before,” said the analyst.

An industry player is hopeful Petronas would not revisit the terms and conditions of existing contracts because there would be legal implications, as contractors also beared certain risks such as foreign exchange and other operating risks at the time of agreement.

On top of that, it would be time and resource consuming for Petronas to change the terms.

“Many oil and gas contracts won were through bidding. In the process, Petronas will shortlist contractors with the technical knowhow and then they will choose the contractor who offered the lowest price,” he explained.

He opined that Petronas might be more conservative in its capex compared with opex when it came to cost-cutting measures.

“Although it had indicated that it would cut capex by around 15% in the event oil prices stayed too low, the national oil company can choose not to spend the capex it initially anticipated,” he added.

He also noted that it was a challenging period for services providers and they too would have to adapt to the new structure and find innovative ways to keep their prices low.

That said, the industry player was hopeful that things would improve in the second quarter because shale production in the United States would no longer be commercially viable if the price of crude oil stayed at this level for too long or falls further. For industry players to remain competitive, they will have to diversify their clientele base.

“Players will also have to look for alternative income revenues to replenish their order-books.”

Source: The Star

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

[winston]

Moody’s: O&G industry entering a challenging 2015

KUALA LUMPUR: The global oil and gas (O&G) industry is entering a challenging 2015 based on stubbornly low oil prices, says Moody’s Investors Service in a report.

According to the rating firm, exploration and production (E&P) companies will be hit first, while oilfield services (OFS) and midstream energy operators will feel the knock-on effects of reduced capital spending in the E&P sector.

Offshore contract drillers are likely to have their toughest year since 2009, while integrated oil majors are the best-positioned to react to lower prices.

Crude oil prices have dropped to around US$55 (RM195) a barrel, from about US$95 a barrel in July 2014, amid growing supply from non-Organization of Petroleum Exporting Countries (Opec) countries, particularly the United States; a slowing increase in global demand; and Saudi Arabia’s decision not to continue acting as Opec’s (and the world’s) swing producer.

“If oil prices remain at around US$55 a barrel through 2015, most of the lost revenue will hit the E&P companies’ bottom line, which will reduce cash flow available for reinvestment,” says Moody’s managing director (corporate finance), Steven Wood. “As spending in the E&P sector diminishes, oilfield services companies and midstream operators will begin to feel the stress.”

If oil prices were to average US$75 a barrel in 2015, North American E&P companies would likely reduce their capital spending by around 20% from 2014 levels, while if they go below US$60 a barrel, spending could be cut by 30% to 40%, Wood says in the Moody’s report. Outside North America, E&P firms would likely reduce spending by 10% to 20%, depending on prices.

According to Moody’s estimates, OFS sector earnings would fall by 12% to 17%, if oil averages US$75 a barrel, while an average price below US$60 a barrel could drive earnings down by 25% to 30%.

Slumping oil prices amid a surplus of new rig deliveries, spell difficult times ahead for offshore contract drillers. Low oil prices will put intense pressure on day rates in 2015, but for the many companies that will have to renew contracts on existing rigs at significantly lower rates, 2016 could prove even more painful, says Moody’s.

Major integrated oil companies will fare better, Moody’s says.

Alliance DBS Research O&G analyst Arnhue Tan said share prices have already declined significantly in tandem with the decline in crude oil prices, reflecting a softer earnings outlook going forward and that “Moody’s article just adds to the negative sentiments on these companies”.

Large-cap Malaysian O&G service providers like Sapura Kencana Petroleum Bhd (SapuraKencana), Bumi Armada Bhd ( Financial Dashboard), UMW Oil and Gas Corp Bhd and Dialog Group Bhd ( Financial Dashboard) will be among those affected this year said Tan, adding that contract flow is expected to be sluggish this year.


Source: The Edge

[winston]

Malaysia: Maybank IB Research sees values emerging in selected O&G stocks

KUALA LUMPUR: Maybank Investment Bank Research sees values emerging in selected oil and gas-related stocks amidst the recent fall in share prices.

“Some selected stocks, in our view, are oversold with minimal downside risk in terms of earnings delivery and default risk.

“While interest on O&G stocks is likely to be at the sideline until oil price stabilises and market adjusts to the new oil price order, we advise investors to position for key picks ahead of recovery,” it said on Thursday.

Maybank Research advocates a focus on oil service providers in the production phase, which are less sensitive to oil price movements and capex cuts given their steady, long term contracts exposure.

It pointed out producing fields will continue to operate for they need to incur just opex and not capex to sustain brownfield activities.

The research house said it adjusted down its new oil price assumption to US$70 to US$75 a barrel.

It lowered earnings forecasts of eight companies (Alam Maritim, Barakah, Icon, MMHE, Perdana, Perisai, SapuraKencana Petroleum and UMW Oil and Gas).

It lowered the target prices of 9 stocks (Alam, Barakah, Icon, KNM, MMHE, Perdana, Perisai, SapuraKencana, UMW-OG).

Maybank Research upgraded three stock calls (two to Trading BUYs, one to HOLD).

“Some, in our view have been oversold and are trading at below replacement values amidst downgrades in earnings.

“Dialog (dedicated tank terminal and re-gas ops), Yinson (FPSO), BArmada (FPSO) and Perdana (brownfield OSVs) are our key tactical BUYs,” it said.

Of these, Dialog is the only Shariah compliant stock (a scarcity premium) while Perdana is an acquisition target.

It expects consolidation to set in with several opportunistic M&A potentials, notably at the OSV and FPSO space.

However, downside risks to 2015 earnings include
(i) persistent high volatility in oil price,
(ii) sustained low oil price level at sub US$60,
(iii) contract replenishment due to delays, suspension of new projects and
(iv) cost overruns and higher opex.

Maybank Research revised down again, earnings forecasts for all oil & gas stocks under coverage (except Dialog, KNM, Wah Seong and Yinson) and adjusted their target prices accordingly following further cuts in its average crude oil price assumption to US$70 to US$75 from US$80-US$85.

Source: The Star

[winston]

not vested

Keppel Corp downgraded to "hold", target cut to $8.80 by Deutsche Bank

SINGAPORE (Jan 9): Deutsche Bank has downgraded Keppel Corp ( Financial Dashboard) to "hold" from "buy" and cut its price target to $8.80 from $11.80, saying new orders are likely to fall this year to about $2 billion from $5 billion in 2014 as oil prices tumble.

It has also cut its price target for Sembcorp Marine ( Financial Dashboard), for which it has a "sell" rating, to $2.50 from $3.20.

It now expects SembMarine to secure $1.3 billion of new orders in 2015, down from $4.2 billion last year.

Both companies, whose shares are highly correlated to movements in oil prices, are facing "significant" headwinds as oil companies cut spending and rig utilisation and day rates fall, Deutsche Bank analyst Kevin Chong wrote in a note.

"As customers delay spending and negotiate prices down on any potential new contracts, it could negatively affect earnings...over the coming years," he said.

As a result, Deutsche Bank has reduced its earnings forecasts by 10% and 6% respectively for Keppel and SembMarine for 2015.

Its projections for 2016 drop by 24% for Keppel and 35% for SembMarine.

It prefers Keppel over SembMarine, citing its "execution strength", product diversification and global reach.

Besides risks to its order book, SembMarine also faces execution risks for the drillships now being built in Brazil, according to Chong.

"The history of new Brazilian yards suggests that the initial years will likely be challenging and for SembMarine, we feel risks are even higher, as it is building an asset (drillships) it does not have any experience constructing and is concurrently developing its yard, which is yet to be completed," he said.

Shares of Keppel fell 1.1% to $8.38 while those of SembMarine shed 1.9% to $3.07 at 2:48pm (0648 GMT).

Source: The Edge

[winston]

Oil-services stocks sink lower… sector fund OIH tumbles more than 40% in the past six months.

[winston]

World's No.1 oilfield services provider slashes 9,000 jobs as oil prices plunges

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

[behappyalways]

Oil company Baker Hughes cuts 7,000 jobs
http://money.cnn.com/2015/01/20/investi ... d=HP_River

[winston]

12 Signs That The Economy Is Really Starting To Bleed Oil Patch Jobs

By Michael Snyder

Source: The Economic Collapse Blog

http://www.thetradingreport.com/2015/01 ... atch-jobs/

[winston]

These companies could be the first victims of the oil crash

Source: Bloomberg

http://thecrux.com/these-companies-coul ... oil-crash/