Lead Story: After an impressive rally, have O&G stocks run ahead of fundamentals?

TheEdge Mon, Nov 11, 2019 02:00pm - 4 years View Original


OIL and gas (O&G) counters have been the surprise winners so far this year on Bursa Malaysia as a steady recovery in crude oil prices, which have stabilised at about US$60 per barrel, helped prop up investor sentiment on the sector.

Year to date, gains in O&G stocks have been led by KNM Group Bhd, which has seen more than 460% added to its market value as at last Wednesday. This is followed by Petra Energy Bhd, with a 305.8% increase in market capitalisation, Dayang Enterprise Holdings Bhd (+261%) and Velesto Energy Bhd, whose share price has doubled.

While optimism in the sector is justifiable with the stabilising crude oil prices and projections of increased investments by O&G majors around the world, some of these companies are still loss-making.

Velesto posted a net loss of RM10.3 million in the first half of its financial year ending Dec 31, 2019 (1HFY2019), though this is lower than the RM19.07 million net loss recorded a year ago.

Perdana Petroleum Bhd, whose share price has surged more than 80% so far this year, saw a net loss of RM38.4 million in 1HFY2019. This, too, was an improvement on the RM56.6 million net loss in 1HFY2018.

“The share price rally was fuelled by the market’s optimism on the pace of recovery in offshore activities in the O&G sector,” Azim Faris Ab Rahim, an O&G analyst with BIMB Research, tells The Edge. “The rally in Velesto’s share price was due to expectations of a recovery in charter rates for jack-up rigs and an improvement in utilisation rates.

“Having said that, I do think that at the current level, investors should not expect much more upside on O&G stocks, especially those that are in the offshore support vessel (OSV) segment as oversupply concerns remain.”

Among the nine analysts covering Velesto, TA Securities has the highest target price of 38 sen per share while HLIB Research has the lowest at 31 sen.

They are of the view that Velesto will return to the black this year on the back of higher utilisation rates of its jack-up rigs and improvements in daily charter rates. This is supported by Petroliam Nasional Bhd’s (Petronas) 2019-2021 Activity Outlook report, which reveals that its requirement for jack-up rigs is expected to increase in 2020 and 2021 from 16 to 18 this year.

While the outlook for jack-up rigs is positive, BIMB Research’s 0.6 sen projected earnings per share (EPS) for FY2019 means that Velesto is currently trading at a whopping 60 times earnings. The research house projects that Velesto’s EPS will increase to 0.9 sen in FY2020 and 1.1 sen in FY2021. Based on the projected EPS and the current share price, Velesto is trading at 40 times FY2020 and 32.7 times FY2021 earnings.

At 36 sen per share, Velesto is currently trading at about one times book value, which is justifiable, says Azim. But he believes the upside to Velesto’s share price will be limited as he thinks 40 sen and above is too expensive.

In a Sept 23 report, AmInvestment Bank analyst Alex Goh says companies with stable recurring income businesses are the research firm’s top picks among Bursa-listed O&G stocks. “We like the recurring income business model of Dialog Group Bhd and Serba Dinamik Holdings Bhd, which are involved in operation and maintenance services. Dialog’s earnings visibility is further secured by the Pengerang Deepwater Terminal project (in Johor) with its enlarged buffer zone.”

The research firm also has “buy” calls on Bumi Armada Bhd, MISC Bhd, Sapura Energy Bhd and Velesto.

Another analyst tells The Edge that at 9.5 times trailing 12-month earnings, Dayang   is expensive, especially given its “quite substantial” debt and compared with other O&G companies with better earnings visibility.

He says Dayang’s focus on Petronas orders and contracts exposes it to earnings risks if the national oil company reduces contracts for OSVs or if there is a reduced requirement for topside maintenance.

Nevertheless, it is expected that there will be a material pickup in maintenance, construction and modification (MCM) and hook-up and commissioning (HUC) contracts in the second half as a result of under-maintenance of oilfields in previous years.

KAF-Seagroatt & Campbell Securities’ O&G analyst Lim Sin Kiat believes that Petra Energy, Dayang and Carimin Petroleum Bhd will be the key beneficiaries of the uptick in MCM and HUC activities by Petronas.

“The three players have obtained a 15-month extension for their HUC package from Petronas. Therefore, we maintain that the upstream maintenance industry dynamics remain status quo for the time being (until 2H2020 when Petronas is expected to invite tenders for the Pan Malaysia HUC umbrella contract).

“While a short-term earnings recovery is expected, we elect to stay more cautious on this sub-segment as work orders might be patchy and a longer-term earnings growth trend needs to be exhibited by the sector before we turn more positive on the sub-sector,” says Lim in KAF’s

Oct 11 Budget 2020 strategy report.

 

Yinson stands out with big upside potential

A fund manager who declines to be named says the recent rally of some O&G stocks was mainly fuelled by a share price recovery play, subject to their earnings growth. “When crude oil prices collapsed between 2015 and 2017, the market had oversold O&G stocks. Now that crude oil prices have recovered and stabilised, the market is overbought.”

Among the O&G stocks on Bursa, he likes Yinson Holdings Bhd because of the group’s ability to secure and deliver on contracts. Yinson’s strong delivery track record has positioned it well to capture the robust upward cycle in the floating production, storage and offloading (FPSO) segment, he says.

On Oct 11, Yinson announced that its subsidiary, Yinson Production Pte Ltd, had received two letters of intent from Petroleo Brasiliero SA (Petrobras) for the provision of an FPSO to the Marlim field off Brazil and operation and maintenance services during the charter phase of the FPSO.

The estimated aggregate value of the contracts is US$5.4 billion, according to Yinson. The FPSO, Marlim 2, is expected to commence operations by the first quarter of 2023, and will be chartered by Petrobras for a period of 9,125 days, or 25 years.

At last Wednesday’s price of RM6.92 apiece, Yinson was trading at 38.3 times its trailing 12 months earnings and 4.3 times book value, the highest of Bursa’s O&G spectrum. Yinson’s current price-earnings ratio is about the highest it has been over the last nine years, even higher than during the peak oil period of 2012 to 2014.

“I am holding (Yinson) shares for future earnings growth. It is a long-term core O&G play,” says the fund manager when asked whether he thinks Yinson has become expensive.

Among the 11 analysts covering the stock, 10 have a “buy” recommendation and one a “hold”. The average target price is RM8.43, which at last Wednesday’s closing price of RM6.92 per share implies upside potential of 22% over the next 12 months.

 

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