Petronas’ conservative stance on capex spending is expected to continue as activity levels for jack-up drilling, HUC and MCM works are expected to fare weaker YoY while activity levels for other segments are expected to remain flat to mildly positive. We only expect to see a pick-up in capex spending beginning from 3Q21 on the premise that the spread of COVID-19 dissipates and we only expect to see a significant improvement in capex spending in FY22. Our Brent oil price forecast remains unchanged at USD55/60 for FY21/22f and we make no changes to our calls and earnings forecast as the activity outlook was largely in-line with our view. Reiterate NEUTRAL on the sector, our top pick for the sector is Bumi Armada (BUY; TP: RM0.65).

Rig. Petronas expects an average of 22 rigs to be chartered in FY21 (10 Jack-up rigs, 4 Tender rigs, 5 Hydraulic Workover Units, 3 semi-sub/drillships) as compared to an average of 18.5 rigs (11.5 jack-up rigs, 2.5 tender rigs, 2 Hydraulic workover units, 3 semi-sub/drillships) in FY20. There were as many as 23 rigs with peak utilization in March before it started to decline due to Covid-19 and plummeting oil prices. While Petronas has planned for more rigs to be chartered in FY21, jack-up rig utilization is expected to be lower YoY, which is expected to be negative for Velesto.

OSV. The outlook for OSVs are expected to be slightly better in FY21 as there are a total of 303 support vessels (Production: 131, Drilling: 172) expected to be chartered in FY21 as compared to 279 support vessels (Production: 138, Drilling: 141) in FY20. Lower number of drilling and project activities resulted in lower AHTS, FCB and workboat/work barge being called out for service in FY20.

HUC, MCM and plant turnaround. Slightly lower HUC and MCM man-hours are expected for FY21 (HUC: 3.5, MCM: 10.1) as compared to FY20 (HUC: 4.4, MCM: 11.2). A better year for plant turnaround activities are expected in FY21 (11 man-hour units) as compared to FY20 (7 hour man-hour units) as 2- turnarounds were deferred to FY21 due to restrictions imposed during the MCO.

Offshore fabrication. Fixed structures fabrication is expected to be slightly lower in FY21 (6 WHP, 1 CPP) as compared to FY20 (7 WHP, 1 CPP) while offshore installation application works are expected to be higher in FY21 (12 lifts vs 2 lifts in FY20).

Outlook. We believe that this is one of the most tepid outlooks that Petronas has produced thus far as there is no indication of a strong pick-up in activities YoY despite the dismal activity levels seen in FY20. Lower jack-up drilling, HUC and MCM activities are expected to affect Velesto and Dayang negatively. We believe that while Brent oil prices have breached the USD50/bbl mark from mid-Dec FY20, Petronas would not have the propensity to materially elevate its capex spending this year due to its dividend obligations to the government as Malaysia thrives to recover from the Covid-19 pandemic. However, we expect capex to start picking-up from 3Q21 on the premise of a successful roll-out of vaccines and the dissipation of Covid-19.

Reiterate Neutral; Brent oil price forecast unchanged at USD55/60 bbl for FY21/22F. We maintain our neutral call on the sector, leaving our calls and earnings forecasts unchanged as Petronas’ activity outlook was largely in-line with our view on the sector. We are only expecting to see a strong recovery in the Malaysian O&G space in FY22 despite our expectations of higher oil prices as we believe that Petronas would only elevate its spending materially in FY22. Our top pick for the sector is Bumi Armada (BUY; TP: RM0.65) as its strong FPSO earnings are expected to continue regardless of Petronas’ capex spending or the volatility in oil prices.

Source: Hong Leong Investment Bank Research - 4 Jan 2021