Business

Saturday March 7, 2009

Oil & gas sector’s performance draws mixed reviews

By TEE LIN SAY


THE economy is going through one of its bleakest times, with oil prices at basement levels of US$40 to US$45.

Not surprisingly, Malaysian oil and gas service support companies aren’t spared and this has been reflected in their fourth quarter results.

On a combined basis, it would appear that oil and gas (O&G) companies underperformed, with combined net earnings declining by some 182% on a quarterly basis.

Nonetheless, a huge chunk of this disappointment was due to poor performances by Ramunia Holdings Bhd, Shell Refining (Federation of Malaya) Bhd, Petronas Gas Bhd and Petra Perdana Bhd. In the case of Shell, it suffered a single quarterly loss of RM523.11mil due to margin pressures.

Ramunia continued with its loss making streak by reporting a net loss of RM71.3mil for the fourth quarter ended Oct 31, 2008. For the full year, Ramunia made a net loss of RM279.8mil.

Generally, the bulk of companies which underperformed, attributed their losses to provisions, cost overruns, inventory loss and lower product demand. It wasn’t a sea of disenchantment. There were the outperformers too.

For instance, Alam Maritim Resources Bhd’s net profit soared 50.03% to RM76.41mil for its financial year ended Dec 31, 2008, from RM50.93mil a year ago due to increased revenue from its offshore support vessels and underwater support services.

The better results were spurred by the increase in number of owned vessels, higher daily charter rates and new contracts secured by its underwater services unit.

Meanwhile, Tanjung Offshore Bhd also delivered earnings above expectations due to a much stronger fourth quarter. The company posted a sterling 38% growth in full-year net profit to RM32mil, some 26% higher than our forecast.

The strong growth in revenue and profitability was due to the completion and delivery of various engineering equipment packages and contracts.

Kencana Petroleum Bhd still aims to maintain an RM1bil annual turnover despite the cyclical environment.

Based on the current workflow, 70% of Kencana’s RM1.5bil outstanding order book as at January this year will be recognised by the year ending July 2010, with the remaining in financial year 2011. It has also begun the construction of its second tender assisted drilling rig and is expected to be completed in May 2010.

Mayban Research expects sector earnings to contract by 2.2% in 2009 before recovering to 5.8% in 2010.

While it cautions that there may be further downgrades as the global economy deteriorates, it says stress tests show little signs of a liquidity crunch.

So far, the O&G industry has not lost its buoyancy. Times are bad, and analysts are expecting companies to use this “downtime” to make their “bad” announcements, provide for their books and renegotiate contracts.

Oil majors may also shelve or delay their exploration activities, hence affecting the fortunes of service providers.

“Companies will take this opportunity to make their provisions and put in their bad expenses,” says OSK analyst Jason Yap who has a “neutral” on the sector.

He’s also predicting charter rates to fall by 10%, and the process equipment segment to see some margin squeeze.

Nonetheless, as the O&G business is typically one that is long-term with contracts locked in, it’s safe to say that the sector is far from dead. It helps too that most of Malaysia’s O&G players are service support companies, and there is insulation from Petronas’ protection.

Petronas is expected to spend RM45bil-RM50bil this year, significantly higher than the estimated RM38bil in 2008.

Since August 2008, 24 major contracts worth RM7.2bil have been awarded to local O&G service providers. Over half of the contracts came from Petronas and its units.

“This is the first year since those contracts have been dished out and I expect companies like Kencana and Petra Perdana to still deliver decent earnings,” says the analyst, who has a “buy” call on these stocks.

Yap is less positive. With no new contracts being dished out in the last quarter, there’s a risk for orderbook replenishment in the short term.

He however has a “buy” call for most oil and gas stocks under his coverage as these stocks are fundamentally cheap and the outlook on the sector is bright in the long term.

Based on pure statistics, oil only has one direction to go, and that is up. Afterall, oil is a finite resource.

The International Energy Association has warned of a serious supply crunch in 2010 due to delayed investment.

Offshore oil and gas engineering and construction player Swiber Ltd made an interesting annotation: ‘We need to find one new Saudi Arabia every three years just to offset production decline!”

The world’s largest producer Saudi Arabia is now producing 8 million bpd per year.

The cuts by the Organisation of the Petroleum Exporting Countries (Opec), source of a third of the world’s oil, have certainly been felt. To date, Opec has lowered output by 3.42 million bpd of the promised 4.2 million bpd.

An important date to watch out for would be March 15, when Opec meets in Vienna to decide oil output policy.

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