AmInvestment Bank advises caution on O&G as state govt takes over Sarawak’s gas trading from Petronas

KUALA LUMPUR (July 9): AmInvestment Bank Bhd has called on investors to adopt a more cautious stance on the prospects for the oil and gas (O&G) sector following the move by the Sarawak state government to take over all natural gas trading activities in the state from Petroliam Nasional Bhd (Petronas).

In particular, AmInvestment Bank told investors to avoid greenfield-related services contractors as O&G contractors involved within the exploration phase of the supply chain will be the most impacted as new field developments may be scaled back.

The research house cited Velesto Energy Bhd (KL:VELESTO) as one of the companies that will be negatively affected by the move.

“Though much of the group’s jack-up rigs are already contracted for with utilisation rates expected at 80% for FY2024F and 62% for FY2025F, we believe the stock is exposed to downside risks from a relatively larger derating, further exacerbated by capped daily charter rates (DCR) if rigs from the Middle East were to be mobilised to Southeast Asia,” it said in a note on Tuesday.

Brownfield maintenance contractors, however, will benefit from the move as Petronas will likely maintain its long-term production target of two million barrels of oil equivalent production per day (boepd) despite the cut in capex (capital expenditure), to ensure Malaysia’s energy security, AmInvestment Bank said. 

“Hence, we believe Petronas will dish out contracts for maintenance, construction and modification [MCM] and hook-up and commissioning [HUC] services, albeit at a lower than previously expected quantum,” it said.  

In this aspect, the research house sees four beneficiaries, namely Deleum Bhd (KL:DELEUM), T7 Global Bhd (KL:T7GLOBAL), Carimin Petroleum Bhd (KL:CARIMIN), and Petra Energy Bhd (KL:PENERGY). “Additionally, we are more favourable on services which are instrumental in improving production levels such as slickline services.”

Meanwhile, offshore support vessel (OSV) players are likely to stay flattish after the current run, according to AmInvestment Bank. The investment bank said OSV players remain fairly sheltered given the significant gap in supply and demand dynamics, which has translated into current DCR levels reaching close to its peaks.

“Our channel checks indicate that Petronas is looking towards hiring OSV players on a term contract basis moving forward, which may translate to a slight discount of 10% to spot DCRs,” it said.  

The beneficiary within this field, according to AmInvestment Bank, is Keyfield International Bhd (KL:KEYFIELD).

On May 13, Sarawak’s Ministry of Utility and Telecommunication announced that Petroliam Sarawak Bhd (Petros) will take over Petronas’ role in all natural gas trading activities in the state, effective July 1.

Petros and Petronas also agreed to sign a definitive agreement where Petronas will acknowledge Petros as the sole gas aggregator under the Distribution of Gas (Amendment) Ordinance 2023.

 

The agreement enables Petros to conclude gas purchase agreements (GPAs) with all upstream producers involved in the production of natural gas in Sarawak and gas sales agreements (GSAs) with all downstream buyers, foreign or domestic.

Consequently, Petronas will cease all buying and selling activities of the product in the state and hand over its natural gas distribution network and system to Petros.

“The role effectively empowers Petros with control over the supply and flow of natural gas produced within Sarawak, and the corresponding tariff charged to customers,” AmInvestment Bank said.

Negative for Petronas

The investment bank sees the move as a negative on Petronas’ upstream earnings if the lower price is shared with upstream operators in any way, coupled with a flattish outlook on global liquefied natural gas (LNG) demand, particularly from major Asia-Pacific LNG customers in Japan, South Korea and Taiwan due to increasing use of nuclear and renewables in their energy mix.

This is significant as the upstream segment accounted for 53% of Petronas’ profit after tax and 68% of its 2.6 million boepd.

“Recall that Petronas reported a 1QFY2024 decline of 12% year-on-year [y-o-y] to RM19.2 billion, after accounting for net impairment and write-backs, attributable to broad-based weakness led by the gas segment by -28% y-o-y after experiencing lower average realised prices of LNG,” AmInvestment Bank said.

However, the investment bank maintained its ‘overweight’ stance on the O&G sector, with its top picks including Dialog Group Bhd (KL:DIALOG), Yinson Holdings Bhd (KL:YINSON), and Petronas Gas Bhd (KL:PETGAS).

Read also:

Petros to assume control of Sarawak’s natural gas trading activities effective July 1

 

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