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PETALING JAYA: Although global oil and gas exploration and production (E&P) investment is expected to be flat this year, Malaysia is seeing improving domestic order flows, said AmInvestment Bank Research (AmResearch).
Malaysia’s order flows in the first quarter of this year saw a quarter-on-quarter (q-o-q) improvement as listed companies announced contracts valued at RM3.3 billion, a 2.2 times increase from RM1.5 billion in fourth-quarter 2020 (Q4’20).
“Year-on-year (y-o-y), this represents an even more rapid surge of 5.6 times from only RM569 million in Q1’20, which was drastically derailed by the onset of Covid-19 pandemic together with the short-lived Saudi-Russia oil war,” it said.
AmResearch said global E&P investment is expected to be flat this year, followed by a 10% increase in 2022, driven by US shale/tight oil, Middle Eastern onshore projects and offshore deepwater developments in Brazil.
Given the improvement in crude oil prices, E&P players are projected to see a 56% increase y-o-y in operating cash flows to the tune of US$580 billion (RM2.39 trillion) this year.
“At US$60 per barrel, free cash flows for public E&P players could double to US$330 billion in 2021 from US$140 billion last year,” the research house said.
However, in Rystad Energy’s Covid-19 April Update and Market Outlook, which AmResearch attended, the energy research firm expects companies to reward shareholders instead of ramping up capital expenditure investments. Therefore, investment ratio is projected to reach only 42% this year versus 65% in 2020, which experienced a sharp drop in prices and demand.
It pointed out that following the harsh winter season in February this year, US shale operators are rushing to catch up with their original plans with Permian fracking activities increasing by 20% q-o-q in Q1 along with a higher rig count.
While Rystad expects substantial increase in US production, this is unlikely to surge to pre-Covid 19 levels over the medium term given shareholders’ expectations for higher dividend yields.
Even so, the energy research firm notes that the values of major oil field service contracts surged threefold q-o-q to US$43 billion in Q1’21 driven by engineering, procurement, construction and installation jobs as well as maintenance & operations.
In regard to the pandemic and the vaccination efforts, AmResearch said Rystad estimated domestic activity in Organisation for Economic Cooperation and Development countries will likely reach near 100% in H2’21 even though international travel will not fully normalise until vaccination has been fully deployed, likely by 2023. As such, new technologies and behaviour will structurally change energy consumption as exemplified by the decline of business travel.
On the whole, the research firm opined that global oil demand will not return to pre-pandemic levels until 2022. Last April, global oil demand saw a sharp drop of 20 million barrels per day (bpd) which has subsequently narrowed to 5.7 million bpd in March this year.
Based on a monthly incremental demand of 430,000 bpd, Rystad expects a December 2021 shortfall of 1.8 million bpd versus pre-pandemic 2019 level, leading to 95.4 million bpd (+6.5% y-o-y) for 2021 with the fastest recovery is expected from East Asia while the rest of the world will struggle with slower growth rates.
AmResearch maintained its ‘overweight’ call on the sector with eight ‘buy’ calls against one ‘hold’ call.
“We recommend Yinson for its strong earnings growth momentum from the full-year contributions of FPSO vessels Helang, off Sarawak, Abigail-Joseph in Nigeria and Anna Nery in Brazil together with multiple charter opportunities in Brazil and Africa.
“We also continue to like Dialog Group and Serba Dinamik Holdings due to their resilient non-cyclical tank terminal and maintenance-based operations.”
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