This article first appeared in The Edge Financial Daily on March 7, 2018

KUALA LUMPUR: Oil and gas (O&G) players are expected to see some form of recovery, supported by better economic conditions this year, according to Malaysian Rating Corp Bhd (MARC).

“The O&G sector outlook has rebounded from what it was years back. This year, we expect the sector to be driven by oil price recovery supported by improved economic conditions, and a recovery in O&G players’ order books,” said its chief rating officer Rajan Paramesran at MARC’s economic and sectoral outlook for 2018 briefing yesterday.

Further, upstream players are likely to see lower impairment this year and Petroliam Nasional Bhd (Petronas) is expected to award more contracts this year, he told the media at the briefing.

While there is hope for improving prospects, the rating agency noted that order books will be lower in values and at shorter tenures than before, thereby there is little earnings visibility for some companies, according to Paramesran, noting the downside risk is any sharp increase in shale production, which could weigh on crude oil price.

In comparison, last year, O&G companies faced a sluggish pace of contract replenishment despite the steady climb in crude oil prices.

To recap, in the MARC-rated universe, there was a rating downgrade for an O&G company last year — an improvement from four downgrades recorded in 2016 and six in 2015. In 2015, the spike in downgrades was due to a sharp fall in oil prices, affecting companies within the O&G sector, said MARC.

Also, in 2017, an O&G support service provider recorded a default — the first time in three years a default was declared among all that were rated by the agency.

MARC anticipates the average crude oil price to be US$62 (RM241.80) to US$63 per barrel this year. However, MARC chief economist Zahidi Alias sees the likelihood of the average price hitting as high as US$65 to US$70 depending on how the global trade developments pan out, especially the US trade tariff policy.

At press time, the benchmark brent crude oil was trading at US$65.59 per barrel.

On the property sector, MARC expects it to remain challenging with the continued slow sales particularly in the high-end segment. The rating agency views the slower sales will compound to property overhang issues, although the inventory isn’t building up as fast.

MARC said the occupancy level and rental in the office and retail segments have been under pressure as a result of supply outstripping demand.

The rating agency expects the country’s gross domestic product (GDP) growth in 2018 to come in at 5.3%, bolstered by strengthening domestic demand and strong external support.

“Generally, the real economy has been trending on a positive side. I am not surprised that we will be growing at 5.3% this year; we might even surpass that,” said MARC chief executive officer Mohd Razlan Mohamed.