April 02, 2020 [The Malaysian Reserve – Published on March 31, 2020] –The price of crude oil is expected to weaken further in April as the combination of lower demand due to the Covid-19 pandemic lockdowns and rising production levels leave the energy market in a supply glut.

The war for market share between Saudi Arabia and Russia has seen the Brent crude oil contract price fall from about US$65 (RM281.62) a barrel in early January to US$26 a barrel at press time, the lowest in more than 17 years.

The West Texas Intermediate (WTI) crude futures contract dipped below US$20 per barrel to US$19.90 in early trade yesterday as the market saw no signs of a truce between major producers to support the price.

BIMB Securities Sdn Bhd analyst Azim Faris Ab Rahim expects the crude oil price to fall further in April as unprecedented oil surplus will quickly fill up global storage tanks.

There will be no more production quota starting April 1. Saudi Arabia and the United Arab Emirates (UAE) are both prepared to boost production with the former

expected to raise production by two million barrels per day (bpd) to 12 million, while the UAE aims to add circa one million bpd to four million bpd, Azim Faris told The Malaysian Reserve (TMR) yesterday.

“The oil market is facing a double shock in terms of supply and demand concurrently, in which both upstream and downstream will be affected,” he said.

BIMB is ‘Underweight’ on the oil and gas (O&G) sector due to the unattractive market outlook in the near term, with the oil price expected to linger between US$10 and US$15 a barrel.

The firm’s top pick is Yinson Holdings Bhd (‘Buy’ call and target price (TP) of RM7.70) as its floating production storage and offloading (FPSO) vessels are leased on a long-term charter at a fixed rate, which provides long-term earnings visibility.

“It is protected against early termination with clients required to pay fees (enough to pay up all project financing related to the FPSO assets) if they decide to do so. Their clients mostly possess a strong credit profile which is unlikely to default on such payment,” he said.

He added that the next growth lever for Yinson is likely to come from FPSO-based projects in Brazil with Petrobras SA expected to proceed with new development projects despite low oil prices due to low cash lifting cost of below US$10 a barrel.

Yinson’s shares closed yesterday 9.81% or 52 sen lower to RM4.78, valuing the company at RM5.24 billion.

RHB Investment Bank Bhd (RHB Research) analyst Sean Lim Ooi Leong said the firm expects Petroliam Nasional Bhd (Petronas) and other oil majors to scale back their spending given the allocated budget was made with a US$50-a- barrel crude price assumption.

“We believe Petronas may tone down more on its international capital expenditure (capex) spending in order to protect the domestic O&G value chain.

“Despite Petronas indicating it would keep its local capex spending between RM26 billion and RM28 billion, there is an increased risk of delay in contract awards and activities within the upstream space,” he told TMR in an email reply yesterday.

Lim noted overall, weaker earnings performance is expected from sector counters as a consequence of lower work demand and compressed margins and the severity dependent on the subsegments within the value chain.

“Production-related work, in our view, will be prioritised over exploatory activities, while brownfield projects may receive more attention over greenfield projects,” he said.

Despite the domestic outlook getting more challenging, RHB Research is keeping an ‘Overweight’ call on Malaysia’s O&G sector as it sees buying opportunities after the recent sharp sell-down.

For the upstream segment, Lim said FPSO players have lower earnings risks under fixed and firm long-term charter contracts backed by compensation clauses.

“Crude storage demand is likely to increase as traders buy more crude, benefitting independent tank terminal players and tanker owners to store oil onshore and offshore temporarily.

“Our top picks for the sector are Dialog Group Bhd (‘Buy’ call and TP of RM3.66) due to its defensive earnings profile underpinned by its tank terminal businesses,” Lim said.

He also likes MISC Bhd (‘Buy’ call and TP of RM8.48) for its recurring income from the liquefied natural gas and offshore segment, coupled with the better petroleum segment as a consequence of higher tanker rates and lower bunker costs.

Dialog closed 1.31% or four sen lower at RM3.02 yesterday, valuing the company at RM17.04 billion, while MISC closed 1.33% or 10 sen lower at RM7.40, valuing the company at RM33.03 billion.

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