Oil & gas sector
Maintain neutral: The oil and gas (O&G) sector’s results for the second quarter of 2019 (2Q19) were largely below expectations. Petrochemical players Petronas Chemicals Group Bhd (PetChem) and Lotte Chemical Titan Holding Bhd (LC Titan) suffered from a narrowing product spread due to weak demand arising from escalating US-China trade tensions, while Petronas Dagangan Bhd (PetDag) was hit by a higher depreciation and an inventory lag loss as oil prices weakened.

 
Hibiscus Petroleum Bhd’s earnings were affected by a higher-than-expected effective tax rate, while delays in contract wins weighed on Malaysia Marine and Heavy Engineering Holdings Bhd’s (MMHE) earnings. Only Velesto Energy Bhd fared better as Petroliam Nasional Bhd (Petronas) ramped up drilling activities.

Consequent to the poor performances, we pared down expectations for PetChem on softer average selling prices outlook, and PetDag on higher depreciation charges. Despite a downside risk to our view, we maintained our financial year 2019 forecast earnings (FY19F) for LC Titan and MMHE; the former should benefit from commercial operations of a US shale gas plant in August 2019, and the latter’s project tenders are expected to be announced in the second half (2H19).

Velesto should see a stronger 2H19 as upstream activities continue to ramp up, and its jack-up rig should hit a 100% utilisation by 4Q19. Hibiscus should see a higher sales volume after spending on a production-enhancement programme. A stronger 4QFY20 (November to January) is expected for Yinson as its floating production, storage and offloading (FPSO) Helang’s new charter begins.

Our positive view on upstream players is premised on recovery in offshore activities after an underinvestment in prior years. We take a “neutral” view on downstream players as we reckoned weaknesses in share prices in 1H19 have largely been priced in earnings risks. We also reckoned the companies’ strong net cash position may provide stability until the market recovers.

Yinson remains our top pick as it rides on rising FPSO demand in Brazil amid limited competition. We also like Hibiscus as a pure-play oil field operator. — BIMB Securities Research, Sept 6