CGS-CIMB said a few oil equipment and services players could see less work in the future with Saudi Aramco’s move to hold back expansion on its crude oil production capacity.

KUALA LUMPUR(Jan 31): CGS-CIMB said a few oil equipment and services players may be affected by Saudi Arabia’s state-owned Saudi Aramco’s move to hold back expansion on its crude oil production capacity.

“The most significant impact of the potential cutback in Aramco’s offshore capex [capital expenditure] spending is on oil and gas services, which could see less work in the future, in our view.

“Drilling companies in Southeast Asia may be at risk of potential daily charter rate (DCR) moderation, even if a couple of the many jack-up (JU) rigs that had previously moved to the Middle East make their way back to SE Asia,” it said in a note on Wednesday, naming Velesto Energy Bhd as one of the players that may be affected.

According to CGS-CIMB, SE Asian JU DCRs had benefitted significantly from the departure of many rigs to the Middle East in the past two years.

As such, it had expected Velesto Energy Bhd to sign a new two-year umbrella contract with Petronas Carigali (Unlisted) at DCR of US$135,000 (RM638,580) per day vs last year’s rate of US$105,000/day, which will protect Velesto in the medium term.

“However, beyond the next one to two years, Velesto could be at risk of DCR moderation in the JU space,” said the house, while maintaining its add call on Velesto with a target price of 27.5 sen.

CGS-CIMB said its discounted cash flow (DCF) valuation models a peak of Velesto’s DCRs in 2025 forecast and a decline from 2026 onwards.

“The degree of the potentially negative impact on JU and offshore support vessels' (OSV) DCRs will depend on whether other Middle East oil-producing countries follow Saudi Arabia down the same route of offshore capex cutbacks,” it added.

However, CGS-CIMB does not expect any impact on floating production storage offload (FPSO) companies as Bumi Armada, which is focused on building its Indonesian portfolio of assets while Yinson that is bidding for the Balaine and Paon FPSO projects in Ivory Coast, Eni and Murphy Oil, respectively.

“Yinson is also making good progress on its three ongoing FPSO construction projects — two in Brazil and one in Angola,” it said.

The house has an add "call" on both Bumi Armada and Yinson with a TP of 73 sen and RM3.18 respectively.

CGS-CIMB does not expect any impact on oil prices in the near term, although Saudi Arabia’s move may reflect a downward shift in its internal expectations for long-term oil demand.

Reuters reported on Tuesday (Jan 30) the Saudi Arabian government via its Ministry of Energy had instructed Saudi Aramco to desist from increasing its maximum sustainable capacity (MSC) of crude oil production from 12 million barrels per day (mbpd) to 13 mbpd by 2027F.

This is a U-turn by the Ministry of Energy, which had just four years ago in March 2020 instructed Aramco to raise its MSC to 13 mbpd.

CGS-CIMB, citing Upstream, said Aramco’s Berri, Zuluf, Marjan, Manifa, Safaniyah and Abu Safah offshore oilfields are key components of its long-term expansion plans but the Safaniyah, Manifa, and Abu Safah offshore oilfield expansion plans may be deferred as Aramco had yet to make a final investment decision (FID) on them.

“The global oil and gas services industry had been eagerly awaiting US$10 billion of Safaniya-related contract awards over the next few weeks, according to Upstream,” it added.

Aramco had previously guided for capex spending of US$48-52 billion in 2023F, up from US$38 billion in 2022, with 60% of the capex designated for the upstream sector. It had also previously said that its capex will “continue to increase until around the middle of the decade” as it expands its MSC via multiple offshore projects.

“With the new directive from the Ministry of Energy, Aramco may no longer spend as much capex as previously anticipated, with new capex guidance to be released in March 2024, “ said CGS-CIMB.

At noon break Velesto was unchanged at 26.5 sen, with 20.2 million shares traded, valuing the company at RM2.18 billion, Bumi Armada flat at 55 sen, with 5.66 million shares changing hands (RM3.26 billion market capitalisation) and thinly-traded Yinson up a sen or 0.39% at RM2.55 (RM7.81 billion market cap).