Another robust year expected for O&G industry

by **Cals** Thu 02 Jan 2014, 09:56

Business & Markets 2013

Written by Fatin Rasyiqah Mustaza of theedgemalaysia.com

Thursday, 02 January 2014 09:43

KUALA LUMPUR: Moving into the new year, the oil and gas (O&G) industry is expected to remain robust with continued contract flows, which will translate into higher corporate earnings for industry players.

A key development area to look forward to in 2014 will be the final investment decision on the RM60 billion refinery and petrochemicals integrated development (Rapid) project in Pengerang, Johor, expected in the first quarter (1Q14).

Aaron Tan, an analyst from MIDF Research, is of the view that this is a positive sign that will spur the downstream petrochemical sector.

“We do not, however, think that the Rapid initiative will directly benefit most Bursa Malaysia-listed O&G service providers as these companies are mainly upstream offshore support service providers. It will be a positive news-based catalyst for the sector as a whole,” he said in a recent report.

CIMB Research analyst Norziana Mohd Inon said that in recent months, various tenders related to the project have surfaced. The project is still within the cost threshold based on the packages that have been tendered out.

“Ideally, construction and engineering works at the Rapid site should start in 2015 to 2016 for completion by 2017 to 2018 so that Petronas [Petroliam Nasional Bhd] will be able to benefit from the expected up-cycle in the petrochemical industry,” she wrote in a report.

Petronas has given out more than RM34 billion worth of jobs out of its RM300 billion capital expenditure (capex) to Bursa-listed O&G service providers up to end-2013. There is more than RM150 billion left for the remaining eight quarters.

In 2012, the group’s capex amounted to RM63 billion, or 21% of the five-year total.

Of the RM63 billion, 50% was spent on domestic projects, which included marginal field development and enhanced oil recovery, 28% was used to finance the acquisition of Canada’s Progress Energy and the remaining 22% to fund international operations.

Norziana said Petronas is still at the early capex cycle and its efforts have borne fruit as the industry’s contract flows had been exciting in financial year 2013 (FY13).

She said FY14 will see the execution of the 3+1, four-package transport and installation contracts which are now up for grabs.

“SapuraKencana Petroleum Bhd, Perisai Petroleum Teknologi Bhd, Barakah Offshore Petroleum Bhd and Global Offshore Malaysia Sdn Bhd, a unit of Puncak Niaga Holdings Bhd, are bidding for the four packages worth a combined RM10 billion.”

International oil companies, including supermajors BP Plc, ExxonMobil, Chevron Corp, Royal Dutch Shell and Total SA are also expected to increase its 2014 capex to US$425.1 billion (RM1.39 trillion) from US$421.2 billion last year.

MIDF Research’s Tan said the anticipated capex spending has met market expectations but this is supported by guidance from the respective international oil companies.

“We view the increase in capex spend as an important signal which indicates an important future perception which is the international oil companies’ optimism that O&G will remain the world’s foremost energy of choice in the years to come.

“Oil prices will sustain at a level high enough to incentivise major oil producers to increase exploration and production activities,” he said.

According to Tan, there will be positive knock-on effects for O&G service providers. Sub-segments of the industry which will benefit are structural fabrication works, vessel building and chartering, pipe related works, offshore support services and supply of ancillary products.

Arhnue Tan, formerly of Alliance IB Research, said excitement in the industry will likely come from the fabrication sub-segment for contract flow and this will also flow into supporting services.

She sees 2014 mirroring 2013 with strong award of contracts, new O&G discoveries and new mergers and acquisitions to further strengthen the competitive position of local companies.

Norziana said the O&G sector is vital to the economy as it had contributed 37% to the federal government’s revenue in 2012.

This article first appeared in The Edge Financial Daily, on January 02, 2014.