KUALA LUMPUR (March 11): Hong Leong IB (HLIB) Research has maintained its "neutral” rating on the oil and gas (O&G) sector, and said it expects short-term oil price risk and earnings risk to the sector to be elevated on recent developments.

In a note today, the research house said due to Saudi Arabia and Russia failing to agree on deeper production cuts, it foresees the probability of Petronas reducing or delaying activities in 1H20 in an effort to protect its cash flow as crude prices trend downwards.

"Earnings visibility on upstream services companies such as rig players — Velesto Energy Bhd (BUY, TP: RM0.26), Dayang Enterprise Holdings Bhd (BUY, TP: RM1.81) for MCM (maintenance, construction and modification) and HUC (hook-up and commissioning) and yards such as Malaysia Marine and Heavy Engineering Corp Bhd (HOLD: TP: RM0.74) enters opaque territory," it said.

In the immediate term, HLIB expects players such as Hibiscus Petroleum Bhd (Not Rated [NR]), Reach Energy Bhd (NR), and to a lesser extent Sapura Energy Bhd (buy, TP: 14 sen) and Dialog Group Bhd (buy, TP: RM3.87) to take a hit due to their direct exposure to upstream assets.

“We also expect Petronas Chemicals Group Bhd (HOLD, TP: RM5.06) to be affected on further downward pressure on ASPs (average selling prices) whilst Naptha based players such as Lotte [Chemical Titan Holding Bhd] (NR) to benefit from improved feedstock spreads further adding to the ASP woes of downstream petrochemicals amidst soft demand on weak global growth," it said.

For forecasts, the research house is revising oil price assumption for this year from US$60 per barrel to U$50 per barrel. 

For the top pick, HLIB said MISC Bhd emerges for its resilient earnings profile backed by long-term time charters, while its spot tankers are potential beneficiaries of higher oil trading. Going forward, it has a relatively decent dividend yield (FY20: 4.3%).

“We are upgrading MISC to 'buy' from 'hold' as its earnings profile remains resilient with circa 70% of earnings coming from long-term time charters, furthermore their spot tankers could benefit from higher oil trading as Asian buyers take advantage of the deep discounts emerging from this crisis.

“We also reiterate our 'buy' call on Dialog, a beneficiary of global oversupply of oil as its tank terminals should see an uptick in utilisation rates, partially offset by a downturn in its upstream assets,” it said.