PETALING JAYA: Local oil and gas (O&G) service providers could face earnings and margin compression should the low oil price remain under pressure.

The Brent crude oil price plunged yesterday to below US$20 per barrel after United States oil fell into unprecedented negative territory on Monday.

On Monday night, the price on the futures contract for the US West Texas Intermediate crude that is due to expire Tuesday fell into negative territory - minus US$37.63 a barrel.

MIDF Research analyst Noor Athila Mohd Razali said she remains cautious on the outlook for the O&G sector for this year, as the low oil price environment tends to result in a cut in capital expenditures (capex) by oil majors.

She pointed out that the development and production would be impacted, resulting from a slowdown in both offshore and onshore activities.

“The low oil price environment also means there will be fewer new contracts for the O&G service providers and there could be delays in awarding extensions to existing contracts.

“Furthermore, margins are also expected to be compressed, given that producers are now more cost-conscious than in a higher oil price environment, ” she told StarBiz via email.

It is worth noting that last week, Petroliam Nasional Bhd (Petronas) warned there was increasing risk of some projects being delayed due to the prolonged lockdowns implemented globally and in Malaysia to curb the coronavirus (Covid-19) outbreak.

Despite the low oil price environment, the national oil company is targeting to maintain its capex for this year.

Earlier, Petronas had said it was allocating about RM26bil to RM28bil in capex for its activities in Malaysian waters for this year, which is higher than last year.

Many oil majors around the world have already cut their capex for this year, which in turn would lead to slow order-book replenishment among the service providers.

For instance, Royal Dutch Shell has reduced its capex for 2020 to US$20bil from US$25bil previously, Saudi Aramco has slashed it to US$25bil-US$30bil from US$35-US$40bil, and Petrobras has cut it to US$8.5bil from US$12bil previously.

The price of crude oil has been under pressure on shrinking oil demand, as almost half of the world’s population is in some kind of lockdown.

Despite the gloom and doom in the O&G sector, Dialog Group Bhd stands out as one of the potential winners due to its storage capacity. “Due to the oversupply situation of crude oil currently in the market, storage has become a crucial part of the value chain, ” Noor Athila said.

Nonetheless, she pointed out that while Dialog is poised to benefit from the increased demand for crude storage, the majority of its tank farm terminals are currently locked in a long-term contract with pre-determined profits.“Only one terminal follows market-driven pricing, which limits its potential earnings accretion at this juncture, ” she said.

“Companies like Dialog with defensive business segments are preferred, and that Dialog will be able to weather the low oil price environment and emerge with minimal impact on its earnings, ” she said.

Additionally, large vessel players such as Yinson Holdings Bhd, BUMI ARMADA BHD and MISC BHD are expected to benefit due to the increase in crude oil storage.

However, Noor Athila reckoned that most of these floating production, storage and offloading vessel players have already locked in long-term contracts.

“While this may limit the potential earnings accretion from the current surge in demand for storage, their earnings will be more or less resilient when compared to other O&G service providers operating in different services segments in the current low oil price environment, ” she added.

Interestingly, despite oil plunging to an unprecedented level, many O&G stocks on Bursa Malaysia have remained resilient, down just about 6% to 10% yesterday, including HIBISCUS PETROLEUM BHD, Serba Dinamik Holdings Bhd and SAPURA ENERGY BHD.

https://www.thestar.com.my/business/business-news/2020/04/22/cautious-outlook-for-oil-and-gas