Oil & Gas Weekly Review: 10th – 16th November 2008

November 24, 2008 at 3:21 am Leave a comment

The Oil & Gas Weekly Review: 10th – 16th November 2008

• Edging below US$60 – fear factor for unconventional oil
Oil prices hit a low of US$54.67 during the week, the lowest price seen since January 2007. High US stockpiles continue to pressure prices as it was reported that total product demand in the US fell by 6.6% in the past 4 weeks. News is that the OPEC is looking to make more supply cuts to help steady oil prices. We believe continued cuts could finally make prices see a mild recovery. In terms of share prices during the week, some slight recovery was seen contrary to oil prices but we believe that upside would be capped in the coming 12-24 months given slowing demand for oil & gas and the push backs on capex spending given the unattractiveness of oil prices especially for unconventional oil developments.
• RM75m of contracts. RM662m so far this month.
Again, Ramunia beefed up their orderbook with an RM75m contract awarded by Sabah Sarawak Shell. The job is part of the major job awarded to Sime Darby last month worth RM1.1bn. Over the month so far, Ramunia has been the only announcer of contracts amounting up to RM662m. We understand the company’s orderbook is in dire need of replenishment and they are the one company with most excess yard space currently. Looking forward towards the end of the year, we expect several more big ticket item contracts for the development of the Gemusut Kakap deepwater fields. To note, one of them would be the RM3.3bn
deepwater pipelaying contract for Malaysia’s second deepwater development in Gemusut and Kakap which SapuraCrest is said to be close to snagging.
• News and Views
In global news, Petrobras of Brazil appear to be facing uphill battles with the current state of oil prices as it is deferring some RM30bn of capex. Also, earnings for the coming quarter are expected to decline by some
80%. Besides that, the EIA and IEA again cut their 2009 forecasts citing poorer than expected demand from US and Europe ahead. Locally, the SSGP got a reaffirmed green light from the government easing fears that
companies involved like Wah Seong, Dialog and SapuraCrest would bear the brunt of the project cancellation or deferment.
• Maintain NEUTRAL on the Sector.

On Petrobras and Saudi Aramco

Last week it was reported in Bloomberg that Petrobras of Brazil has chalked up the biggest losses amongst the 10 top ten listed companies in Brazil. Earnings estimates by analysts are that earnings would dip as much as 80% in the coming quarter due to the state of oil prices. This follows the news that the company had deferred its capex announcements for 2009 which amounts to an estimated US$30bn due to the limited
availability of credit. To note, Brazil has one of the world’s largest ultra deepwater finds, Tupi, of which oil & gas deposits at certain sites lie up to 10km below the seabed.
Production costs per barrel are thought to be above the US$60 level making the economic viability of this development difficult to justify currently.
Petrobras’s capex spending plans are significant to the global oil & gas industry as they involve the building of more than 20 deepwater rigs and >150 support vessels. The loss of cut back on these plans would have many repercussions on the shipbuilding industry. Saudi Aramco issued a statement that they would reduce supplies by 5-6% to Asia in December as demand for naphtha and diesel are seeing a slump hence causing trouble at major refineries. Countries targeted are Japan, South Korea and Taiwan. Saudi Aramco is the biggest contributor to OPEC output and the cuts are part of the 1.5m output cut announced by the OPEC last month. To note, Saudi Aramco exports 50% of its output to Asia and cuts in output would also eventually mean cuts in capex spending over the coming 12 months given the lack of need for additional capacity.

IEA and EIA cut demand forecasts. Again.

The IEA and EIA again cut demand forecasts for 2009 citing less that 1% growth in the demand for oil during the period. According to the two bodies, even continued demand from China would not be able to offset declining demand from the US and Europe in the coming 12 month term hence in their view, prices will not see a recovery anytime soon. In fact, the EIA has placed its 2009 forecast at US$65.00
However, the IEA during the week issued their annual market outlook report and forecasts into 2030 and they are of the general belief that the current state of the market is merely a short term mismatch of demand and supply. Over the long run, oil prices will recover to highs on the premise of supply shortfalls. But all this not because of declining reserves but rather the lack of investments which are envisioned to be in the trillions. The shortfall will also be brought on by China and India where increased population and affluence will drive vehicle demand and hence the need for crude oil derivatives.

And at home, SSGP gets a proper green light

The SSGP (Sabah Sarawak Gas Pipeline) was confirmed during the week by two ministers and companies with contracts on hand relating to the project will proceed as planned. Just to recap, the SSGP has yielded 3 contracts so far out of the RM3bn planned budget. The project is meant to connect Kimanis to Bintulu by a gas pipeline and so far:-
• Dialog and consortium are laying the pipeline and building facilities (RM1.6bn)
• Wah Seong is coating the pipes (RM390m)
• Scres is laying some offshore pipes (RM580m)
From what we know, works had already started on the project some months ago and we believe the reaffirmation of the contract was in view of oil prices and that Petronas might cut back on its budgets. We do not believe that this will be the case especially for jobs already underway.

Sapcres might be close to finally getting the Gemusut Kakap pipe laying job

SapCres is supposedly close to nailing the estimated RM3.3bn, 3-4 year pipe lay contract for the Gemusut Kakap deepwater development off Sabah. We have not factored this contract into earnings but expect that the bulk of the impact would be seen 2010 onwards should the contract be awarded soon. We figure that the project would yield margins of and estimated 5-10% at EBIT level hence would have some impact to net
earnings which are estimated at RM114m for FY10. Also, it is important to note that the Group has only 51% in the vessel hence total Group top line would be increased by RM1.65bn. Total group orderbook has the potential to expand to RM9bn with the inclusion of this contract. In the meantime, we continue to have our hold call on SapuraCrest. Based on some back of envelope calculations, the contract could bring up our target price of RM0.72 to roughly RM0.82 thus resulting in us keeping our call unchanged.

Market Movements

Mild recovery
Share prices have had a pretty good week considering the past 4 weeks where selldown’s were at large. We still believe however that share prices will recover slightly but upside is ultimately capped given the lukewarm outlook on oil & gas prices and the many concerns in the market about slower capex spending on E&P over the coming 12-24 months even if oil prices recover to the US$80-90 level. No share buy backs were seen during the week but there were some changes in shareholdings announced indicating some interest from institutional funds. Sapcres, we think, may continue to get more attention leading up the
major contract being announced.

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Plantations Weekly Review: 10th – 16th November 2008 Construction Weekly Review: 10th – 16th November 2008

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