Oil & Gas Sector - Petronas reduces rig count NEUTRAL, 17 Aug 2015

According to StarBiz today, Petronas has indicated that only 14 of its oil rigs will be in operation by year-end, compared with 39 as at end of last year amid the current depressed market conditions for the oil and gas sector. This is not a major surprise given that the group had earlier indicated that it will focus on optimising its cost structure which would see a reduction in capex by 10%-15% for 2015 and opex by 30%, as crude oil prices remain low.

This is in line with the global rig count which has fallen sharply by about 60% since the oil price slide last June, as it is less viable to be operated in the current environment. The daily also reported that international oil companies (IOCs) such as BP, Royal Dutch Shell, Chevron, Norway’s Statoil and Australia’s Woodside Petroleum have collectively shelved some USD200bil of their planned capital expenditure on projects due to the slumping oil prices.

We believe that UMW Oil and Gas (UMWOG) (SELL, FV: under review) will remain unaffected in the near term as its two rigs under contract with Petronas Carigali (PCSB) is on a term charter. UMW Naga 1 – a semi-submersible jointly owned with Japan Drilling Co – is contracted with PCSB until August 2018, while the three year contract for UMW Naga 4 jack-up rig will run until April 2016. However, we believe that UMWOG’s earnings this year will be weighed down by UMW Naga 7 jack-up, which still remains uncontracted for the year. Recall that UMWOG is seeking an award for damages amounting to USD19.2mil for early termination fees from Frontier Oil Corporation (FOC), following the latter’s failure to arrange for a bank guarantee of USD5mil and an advance payment of USD15mil to charter Naga 7 for 4 months starting from February 2015.

We expect the operating environment for OSVs to remain slow, given the slowdown of contract flows. Charter rates have also softened given the overcapacity, especially for lower bhp vessels. While works in the existing production fields will remain relatively unaffected, we see muted growth prospects against the backdrop of a slowdown in upstream activities. Overall, we prefer established companies that are exposed to the production phase with long-term service contracts and recurring income, as these are less sensitive to the oil price fluctuations. We maintain our NEUTRAL view on the sector with BUY calls on Yinson Holdings (FV: RM3.60/share), Dialog Group (FV: RM2.05/share) and Bumi Armada (FV: RM1.50/share).

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