Malaysia’s national oil company, Petroliam Nasional Bhd (Petronas), on Friday announced plans to cut its annual capital expenditure by 21%, although it previously said it would maintain its budgeted spending programs. Petronas will also cut 2020 operational spending by 12%. This announcement shocked domestic upstream oil and gas service providers which have been already battered by plunging oil prices.
Other global oil majors such as Shell, ExxonMobil, Petrobras, and Saudi Aramco have announced a 20% to 30% reduction in their 2020 capex. According to estimates by the International Energy Agency (IEA), global oil companies will cut upstream investment by 32% from $490 billion to $335 billion as they struggle to rebalance the supply-demand dynamics caused by the steep demand decline during the COVID-19 pandemic.
Analysts at TA Securities Research have downgraded the oil and gas sector to “underweight,” saying that Petronas’ capex cut posed a risk to upstream service contractors’ earnings and balance sheet. During this downturn, local upstream oil and gas service companies have performed a series of aggressive cost-saving measures including debt restructuring, asset impairments, asset divestment, workforce layoffs, fleet rationalization, and supplier terms renegotiation.
Lower opex also means that local-centric services providers and contractors will see their margins and pricing squeezed. Demand for offshore support vessels (OSVs) is expected to decline, in line with lower offshore activities.
On the other hand, mid-stream players such as maintenance contractors, brownfield service providers, and naphtha-based petrochemical makers are expected to remain resilient. Petronas is likely keeping budgets for operations and maintenance as they are needed to ensure current production assets to continue generating cash flow.
