Oil & Gas Weekly Review: 15th – 21st December 2008

December 23, 2008 at 2:28 am Leave a comment

· No respite
Oil prices are now nearing the US$30 level (falling another 26.8% during the week) despite the OPEC announcing another 2m bpd cut to output during the week that would be effective in January 2009. The general market is of the opinion that the cuts will not follow through completely hence the lack of reaction in oil prices. On the flipside, some voices in the industry are talking about some recovery in oil prices to occur later next year when demand starts to kick back in and also when output cuts by Saudi Arabia are felt in the market.
· Expected drop in 2009 Capex spending.
A survey carried out by Barclays Capital of 357 o&g companies indicated that 2009 capex was to shrink by some 12%, the first time in 6 years to US$400bn. 30% of the companies surveyed indicated that the challenging credit market conditions have affected capex plans this year, with 42% of respondents anticipating that credit market conditions may affect spending during 2009. E&P spend in the US and Canada is expected to be most severely affected with super majors reporting a flattening in international spending. In Asia, while the likes of CNOOC, Pertamina and Reliance are scaling back spending, Petronas and ONGC continue to power ahead. We see this as being much expected and needed given Petronas’s cash reserve, and the fact that Malaysia is only several years away from becoming a net importer.
· News and Views
Concurrent with the news item above, a subsidiary of Petronas is buying Marathon Oil’s Irish unit for RM628m to gain a hold on their gas reserves. At home Alam Maritim continues to pursue its fleet expansion programme by forming a JV with Trinity Offshore. Also, Scomi was awarded a small RM41m contract for drilling waste management in Norway.
· Maintain NEUTRAL on the Sector.
While most companies have their 2009 order-books locked-in, there continues to be much concern on order-book replenishment amongst companies, most of which are unwilling to commit to 2010 forecasts at this point given the uncertainties in the market. We believe that it will be some months before the industry sees the light of day hence we maintain Neutral on the sector.

Stock prices were flattish during the week despite the plummet in oil prices except for KNM which continued to see selling pressure. We believe most sentiments on the sector to be largely negative. Most stocks have been sold down to levels pre 2007 however, hence the potential for some upside which would be largely capped. We believe that even if oil prices were to recover, we do not expect the same levels of price appreciation nor earnings growth seen over the 2005-2007 period as concerns on companies with high borrowings will persist.

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