Stronger 3Q results likely to boost O&G sector

TheEdge Tue, Nov 05, 2019 09:54am - 4 years View Original


Oil and gas (O&G) sector
Maintain neutral:
Large-cap Petroliam Nasional Bhd (Petronas)-related names, with the exception of MISC Bhd, have underperformed the broader FBM KLCI index, while stock prices of small- and mid-cap companies have outperformed, on the back of higher activity. As we move into November, the focus will be on corporate earnings. We highlight that maintenance and rig players could post stronger third-quarter (3Q) results benefitting from higher job flows. Contract flows are likely to see a stronger ramp-up to make up for underspending by Petronas in the first half of 2019 (1H19). We have “buy” calls on Dialog Group Bhd, Serba Dinamik Holdings Bhd, Velesto Energy Bhd, Bumi Armada Bhd and Kelington Group Bhd. We maintain our “neutral” stance on the sector.

 
Petronas has significantly underspent on its capital expenditure (capex) totalling RM16 billion in 1H19 or 32% of its full-year RM50 billion target. The guidance is still unchanged, showing its commitment to roll out more contracts in the coming months. Out of the RM50 billion, Petronas has allocated half for domestic projects. We believe activities will remain robust, with its domestic upstream capex also guided to be higher at RM15 billion versus RM8 billion in 2018.

The jack-up rig demand in Malaysia steadily improved from 10 operational rigs in the first quarter of 2019 (1Q19), to 13–14 rigs in 2Q-3Q19. This is in line with 16–18 rig requirements according to Petronas’ activity outlook. Daily charter rates (DCRs) in the Southeast Asian region for jack-up rigs with a water depth of more than 350ft (106.68m) are now in the range of US$65,000-US$95,000 (RM269,789-RM394,307) (versus US$55,000–US$65,000 in January 2019), less than 350ft of the current DCR at US$48,000-US$65,000 (versus US$45,000-US$60,000 before).

We gather that offshore maintenance players are likely to post strong 3Q19 profits. This includes the maintenance, construction, modification contract beneficiaries like Deleum Bhd, Carimin Petroleum Bhd, Dayang Enterprise Holdings Bhd and Petra Energy Bhd (non-rated). We understand that the first two, which operate in Peninsular Malaysia waters, are servicing one additional platform shutdown versus 2Q19, while the last two are likely to benefit from more hook-up commissioning works quarter-on-quarter.

We prefer companies with more exposure to brownfield works and good earnings visibility. We like Dialog and Serba Dinamik (maintenance), Velesto Energy (jack-up rigs), Bumi Armada (floating production storage and offloading, a recovery story with more potential positive news), and Kelington (a promising long-term industrial gas story). However, in view of the recent sector run-up and some stocks under our coverage nearing their fair values, we recommend to take profit on upcoming strong 3Q result announcements, as 4Q/1Q are seasonally weak due to the monsoon.

Any potential upgrade to our “neutral” call on the sector hinges on: i) a stronger recovery in global oil prices; ii) faster roll-outs of contract awards; and iii) work orders leading to better corporate earnings improvement.

Further downside risks would be affected by a holdback in clients’ capex spending adversely impacting work activities. — Affin Hwang Capital, Nov 4

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