By FARAH ADILLA
KUALA LUMPUR: Petroliam Nasional Bhd's (Petronas) lowered capital expenditure (capex) could translate to project deferments and slower contracting opportunities, said Kenanga Research.
This will affect fabricators such as Sapura Energy Bhd and Malaysia Marine and Heavy Engineering Bhd, hook-up and commissioning companies, including Dayang Enterprise Holdings Bhd and Carimin Petroleum Bhd, drilling service providers like Velesto Energy Bhd, as well as floating, production, storage and offloading (FPSO) providers such as Yinson Holdings Bhd and MISC Bhd.
Kenanga Research also said Petronas' reduction in operational expenditure (opex) could exert margins and pricing pressure on local services providers and contractors like Dayang and Uzma Bhd.
Against the challenging backdrop of low oil prices and Covid-19 outbreak, Petronas recently announced that it would reduce its capex by 21 per cent and opex by 12 per cent from what was previously budgeted.
Before this, Petronas had guided its current year's capex to be slightly below RM50 billion, flattish against 2019 capex spend of RM48 billion.
"With Petronas announcing cuts in both capex and opex in its efforts for cost compression and cash preservation, we expect the effects to cascade down to all value chains across the sector, especially on local-centric players.
"The overall lowered offshore activities could also translate to slower OSV (offshore support vessel) demands, impacting players such as Perdana Petroleum Bhd, Icon Offshore Bhd, and Alam Maritim Resources Bhd," Kenanga Research said.
The firm said while oil prices were expected to stage a gradual recovery in the second half of the year as economic activities progressively resume, it was unlikely for Brent crude prices to revert to more than US$60 per barrel levels for the time being (next six to 12 months).
This is because the effects of project delays, operational disruptions and margins squeeze could reverberate throughout the sector over the next few quarters.
"Our in-house average Brent crude assumption of US$40 per barrel for 2020 has already taken into account a slight recovery in the second half of 2020," it said.
Kenanga Research maintained its "neutral" on the sector.
Its top pick includes names with resilient earnings and balance sheet to provide a degree of defensiveness, including Dialog Group Bhd and Serba Dinamik Holdings Bhd.
It also highlighted Bumi Armada and Uzma as potential bottom-fishing plays (trading at discounted valuations of 4x and 7x price earnings ratios, respectively) for the nimble traders.