Oil & Gas Monthly Review: November 2008

December 2, 2008 at 4:45 am Leave a comment

• Beyond worst expectations
Oil prices fell another 18% during the month following October’s plunge of 33%. As prices continue to be embroiled in a continued downward spiral, problems arise left, right and center in the industry. First, the OPEC is looking to make another supply cut, still in attempt to curb falling prices and the world’s biggest oil company, Saudi Aramco, has been biding to the OPEC’s call and slashing output. Besides that, the company is cancelling and delaying developments and causing others in the industry to follow suit. Besides this, unconventional oil developments, at these prices, could be running into losses already this would shave off a lot of capex spend industry wide we think. December looks equally bleak for the sector but we believe that prices will stage a mild recovery next year when demand comes back into play and supply cuts finally begin to take effect.
• Contract flow a mere trickle this month.
Contract announcements were minimal at RM579m month (RM3.98bn last month) and with this we believe that the bulk of major tenders by Petronas Carigali, Shell and other oil majors are done for the year. As it is, contract awards have exceeded RM20bn this year and it is likely that many companies would choose to wait a while before making new tenders to take advantage of the drop in material prices. Ironically this month, along with the startling rejection by MISC, Ramunia also snagged themselves some RM579m of fabrication contracts and had the industry believing that all was well with the company.
• Results review – largely below expectations
It was a relatively dismal 3Q with Wah Seong, KNM and Petra’s results coming in below our expectations despite our already lower than market estimates. This has brought us to resolve to another cut in earnings
ranging from 5-20% across the board but largely for FY10 earnings where even companies have warned of uncertainty of the future. We honestly do not believe that we can go any lower with our numbers as these
companies do have sturdy order books. In a seemingly odd move though, we did upgrade Petra to a buy as we still found upside to our already low TP of RM2.00. It would appear as if for some stock, the bad news is
already all-in.
• Maintain NEUTRAL on the Sector.
There could be some trading potential seen for some companies at this juncture we believe, but upside looks ultimately capped for now given the state of oil prices and uncertain economic conditions.

IEA October. OPEC’s uphill battle.
The IEA reported another slash in demand expectations over the month and reports on the OPEC’s uphill battle in fighting the fall in oil prices. Despite that countries like Saudi Arabia have cut back on their output, total global oil supply continued to see a rise during the month by 1.8m/bpd as production outages eased in Libya, Iraq and Angola. Refineries have seen lower throughputs during the month and negative margins were a perennial problem given the fall in oil prices. Industry sources say that refinery investment for 2009 is
beginning to wane given the uncertain economic outlook. This could mean another round of supply shortage as and when demand numbers kick back in. Timelines prove to be the main reservation at this juncture for the entire industry.

Contracts – ironic that all are for Ramunia
Contract announcements have been few and far in-between this month and with this we believe that the bulk of major tenders by Petronas Carigali, Shell and other oil majors are done for the year. As it is, contract awards have exceeded RM20bn this year and it is likely that many companies would choose to wait a while before making new tenders to take advantage of the drop in material prices. Ironically this month, along with the startling rejection by MISC, Ramunia also snagged themselves some RM579m of fabrication contracts and had the industry believing that all was well with the company.

Results Review

Largely below
Results could be summed up to be disappointing during the quarter. In fact, results have generally disappointed for the large part of the year so far as companies have had to deal with delays and rising costs of operations. This is all despite orderbook reaching historical highs and companies undergoing aggressive expansion. Conservatism would be the theme for next year we believe in view of the uncertainties in the market.

Mixed
Share prices were mixed during the month with the bulk of them seeing a mild recovery after hitting new lows over October which was indeed a worrying month for oil prices as it lost 33% in value. KNM continued to see weakness and some changes were seen in foreign shareholding where Smallcap World Fund emerged on top of Fidelity as a major shareholder. As for share buybacks, only KNM was active and bought back 6.2m shares compared to the aggressive 26m bought back last month.

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