Oil & Gas Monthly Review: December 2008

January 7, 2009 at 6:53 am Leave a comment

· Uphill battle continues into 2009
Needless to say, the industry has had itself a tumultuous year and expectations are that 2009 will be a range bound year right until demand numbers start coming through again. Oil prices closed at US$44.6 per barrel on Dec 31, staging an 18% decline from November’s close and averaged at US$99.7 per barrel for 2008. Many are banking that a bottom in prices has been see as during the month, also a time when oil producers the world over held their breath as prices neared the US$30 mark. The OPEC continues their attempt at defending prices and vouches to shave off another 2.2m bld that should be effective Jan 2009. While these output cuts still fail to cause major jolts in the market, we believe that they eventually will when falling demand flattens out. Adding some fuel to the fire over the past week has been the return of geopolitical tensions, now in Israel and also a contract dispute between Russia and Ukraine.
· Est. RM20.1bn of contracts in 2008 was awarded to companies
and we see this number to exceed awards in 2007. Some 41% of the contracts awarded last year were for fabrication works and went largely to the likes of MMHE, Sime Engineering, Kencana and Ramunia. The next two chunky items were rig and offshore support vessel charters & orders
that were snapped up by asset owners like SapuraCrest, Petra Perdana, Alam Maritim, Sealink, UMW and shipbuilders like Coastal Contracts and Muhibbah Engineering. The main takeaway from this is that 2009 earnings for most companies are visible and healthy but as we have mentioned before, our concerns continue to point towards 2010 and beyond.
· News at home and abroad
Industry news has been dominated by the OPEC and criticisms towards to OPEC over recent weeks and also some news of spending budget cuts was seen from a survey conducted by Barclays which expects a 12% shrink in E&P spend. Besides this, there has also been talk of stock piling
activities commencing in the US and China and this may lift prices in the near term. ODS-Petrodata also reports that world rig fleet utilisation has reached an all year low given low O&G prices. At home, things have been pretty quiet with corporates except for Petronas making a small acquisition of Marathon Oil’s Irish operations, reporting progress of its operations of a
LNG project in Australia and announcing 1H09 results.
· 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.

State of the Industry

IEA November.
The IEA reported in their November round-up that year end numbers for 2008 will show the first decline in oil demand since 1983. 2009 is still expected to show a slight improvement in demand as the IEA expects economies to recover in 2H09. They also believe that non-OECD demand could be able to hold up the market to an extent in the event of further demand destruction seen in the US and EU over 2009. Just last week, the IEA chief economist came out with a long term view and said that oil prices could rebound to US$100 between 2010 and 2015. He said that energy investments have taken a hit around the world and the projects aimed to develop oil fields are being postponed. This poses a risk post 2010 when demand comes through again and supply threats kick in.

News and views

Contract awards in 2008 amount to RM20.1bn
Over 2008, some RM20.1bn worth of oil & gas service contracts was awarded to local listed companies and we see this number to exceed awards in 2007. Over November and December, contract awards tapered off significantly like due to seasonal factors. Some 41% of the contracts awarded last year were for fabrication works and went largely to the likes of MMHE, Sime Engineering, Kencana and Ramunia. While the toplines of these companies have seen expansion, bottom-lines struggled during the year due to cost of operations and materials. The next two chunky items were rig and offshore support vessel charters & orders that were snapped up by asset owners like SapuraCrest, Petra Perdana, Alam Maritim, Sealink, UMW and shipbuilders like Coastal Contracts and Muhibbah Engineering. Nonlisted major shipbuilders like Nam Cheong also had quite a year. The main takeaway from this is that 2009 earnings for most companies are looking relatively healthy but as we have mentioned before, our concerns continue to point towards 2010 and beyond.

World rig utilization, lowest in 2008, bad news for rig owners

ODS-Petrodata reported that the worldwide working offshore rig count, which never fully recovered from this summer’s hurricanes in the Gulf of Mexico, now is facing pressure from low oil and natural gas prices. According to ODS-Petrodata’s online RigBase market intelligence tool, 558 of the world’s 707 mobile offshore drilling units are working, although more are under contract or have work commitments. Working fleet utilization is 78.9 percent, its lowest level of the year if the effect of hurricanes on the U.S. Gulf fleet is disregarded.
Meanwhile, supply continues to increase with new rig deliveries, and demand forecasts have been tempered, meaning that worldwide offshore rig fleet utilization could slip even lower in early 2009. According to RigBase, 64 new mobile offshore drilling rigs will be delivered in 2009. Of these, 24 do not have contract commitments as of Dec. 31. All 24 are jackup units, and the influx of new supply may have a negative effect on fleet utilization and day rates in some markets. At the time of their initial orders, 44 of the rigs due for delivery in 2009 were considered speculative orders, that is, without firm contract commitments.
While the news is worrying indeed, we see that local rig owners, namely UMW and SapuraCrest, might be shielded in that they are tied in for the long term in their contracts and most charters are in Malaysian waters where the local preference policy has them in a cozy spot. However, with the state of things, they will certainly be bearing some brunt when rig charter rates start to come off vis-à-vis the timing of their contract renewals. From what we know, only UMW has a rig on order currently and that could see lower rates and we have already factored these assumptions into our numbers. As for SapuraCrest, the next renewal for 2 of their rigs will be in 2010 and lower numbers have been expected too.

Petronas reports 1H09 results

Petronas reported their 1H09 results during the month and it shows that despite efforts to shore up reserves, growth has only been minimal. Press statements showed that they will continue to invest but the bulk of the E&P spend is likely to be overseas. Petronas had already warned earlier that Malaysia could be come an oil importer in less than 5 years. Also we see that increased spending abroad and declining reserves at home could leave local oil & gas service companies a little vulnerable going forward.

Market Movements

Continued decline
After a relatively flattish performance over November, share prices went into negative territories again over December as crude oil continued its steep decline. KNM again topped the list of losers but has been attracting high volumes over the month and gaining popularity with investors. It still waits to be seen on the impairment issue and only come February we will find out when FY08 results are announced. As for other companies, no major developments were sen that led to share prices declining other than general market and commodity price weakness. On share buybacks, only KNM continues to power ahead.

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