Oil and Gas Sector
Maintain positive: The Brent crude oil price is on a slight upward trajectory after experiencing a steep slump towards the end of 2014. Year-to-date, Brent crude price has appreciated by approximately 6.3% to levels surpassing US$60 (RM220.80) per barrel. Going forward, we are of the view that Brent crude price will trade between US$60 and US$70 per barrel in 2015.

Most, if not all, global oil and gas producers including Petroliam Nasional Bhd (Petronas) have reiterated that there will be significant cost rationalisation in 2015 and beyond. Petronas will be reducing capital expenditures by 10% and operating expenditures by approximately 25% to 30%. The effects are already felt in the industry, and in the equity markets, as selected oil and gas service providers were asked to relook and renegotiate existing contracts. Our channel checks indicated that some offshore support vessel (OSV) operators were asked to readjust downwards charter rates for existing and new contracts, whereas some operators experienced vessel cancellations.

The positive side of cost rationalisation is with regard to operating efficiency. During times of subdued oil prices, operators and service providers can expect fewer job orders but at more competitive rates. As such, companies would need to review their own operating costs in order to submit competitive bids. This view is

corroborated by local OSV operators. In addition, during times of comparatively low vessel charter rates, certain OSV operators would prefer spot charters (short term) as opposed to long-term charters as they are not willing to risk locking in a vessel at a low rate for a prolonged period.

At this point in time, we have only one OSV operator under our coverage — Perdana Petroleum Bhd. We are aware that as the production sharing contract operators are embarking on cost rationalisation, charter rates will face downward pressure and the charter of vessels will be at risk. There could also be knock-on effects from other sub-segments on the OSV industry.

For example, in the event that hook-up and commissioning (HUC) contractors such as Dayang Enterprise Holdings Bhd were to experience rescheduling in job orders, the knock-on effect could be felt on Perdana as Dayang charters the vessels for its HUC activities from Perdana.

Despite the lacklustre sentiments, contracts continue to flow from Petronas. For instance in 1Q15, Petronas awarded Alam Maritim Resources Bhd and Icon Offshore Bhd with OSV umbrella contracts. Engineering and maintenance works were also awarded to Barakah Offshore Petroleum Bhd by Petronas in 1Q15. In addition, activity levels remain robust in Malaysian waters as can be seen from the huge increase in national crude oil production. — MIDF Research, March 9

This article first appeared in The Edge Financial Daily, on March 10, 2015.