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Kenanga Research & Investment

Author: kiasutrader   |   Latest post: Fri, 6 Dec 2019, 5:41 PM

 

Oil & Gas - Rough Patch

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Crude oil prices have displayed high volatilities of late, plunging below the USD60/barrelmark from a high of USD85 in Oct-2018. Going into 2019, we expect Brent crude to average at USD60/barrel, within a trading range of USD55-65/barrel. With oil prices at these lower levels, we expect job flows to come from the brownfield/opex-related space as new greenfield projects become less economically attractive. Under Petronas’ latest activity outlook, the oil major highlights possibly higher activities within the drilling, vessel chartering, maintenance and decommissioning space, benefiting players such as VELESTO, ALAM, PERDANA, ICON, SERBADK, DAYANG and UZMA. Meanwhile, our studies also have shown that during these times of volatility, a company’s underlying fundamentals (i.e. ROE) plays a greater importance in determining its trading valuations. Should sentiment/oil prices improve, our studies highlighted possible bottom-fishing opportunities in DAYANG, SAPNRG, MHB, and UZMA. However, given recent volatilities and uncertainties, with many names within the sector still plagued with balance sheet concerns and earnings instability, we still prefer to stick towards fundamentally more solid counters, i.e. DIALOG, SERBADK, YINSON, on top of staple Petronas names. Overall, we maintain NEUTRAL on the sector, with SERBADK as our top-pick given its commendable earnings growth delivery coupled with its superior ROE against its peers.

Oil prices still highly volatile. Oil prices have been showing signs of volatility of late, with the Brent plunging steeply by over 30% to breach below the USD60/barrel-mark after touching a high of >USD85/barrel in just October last year. While this may have help prompted OPEC+ to agree to a 1.2m barrels/day production cut in efforts to lift oil prices, there is still a greater sense of uncertainty lingering as fears of oversupply and deteriorating demand still remain at large, with oil prices still remaining sluggish even after OPEC+ announcing its output cuts. These are exacerbated by high U.S. crude inventories coupled with an expected slowdown in global economic growth moving forward. Meanwhile, Iran, Venezuela and Libya are being exempted from the OPEC+ cuts, while Qatar has also left the cartel in pursuit of its own natural gas agenda. Taking into account supply-side factors as well as an expected slowdown of global economic growth, we view 2019 Brent prices to average at around USD60/barrel, with an expected hovering range of USD55-65/barrel (down from previous forecasts of USD75 average).

Petronas activity outlook indicates pick-up in job flows. Meanwhile, reading through Petronas’ Activity Outlook 2019- 2021, we see a likely increase in activities in the areas of: (i) drilling rigs and HWUs, (ii) marine vessels and barges, (iii) hook-up & commissioning (HUC) and maintenance, construction & modification (MCM), as well as (iv) decommissioning. Overall, we believe these could benefit local names which include (i) VELESTO on the back of increased drilling activities, (ii) vessel charters such as ALAM, PERDANA, ICON, (iii) maintenance players such as SERBADK, DAYANG, and (iv) UZMA with track record in decommissioning. That said, we also still believe cost pressures to still persists, and thus, there is still a need for service providers to remain competitive.

Counters’ trading patterns closer to fundamentals. With 2018 being a volatile year for both crude oil and share prices, we noticed valuations for oil and gas counters to trade closer in tandem with its financial fundamentals, as opposed to more stable years previously e.g. 2013-2014. As such, we are led to believe that (i) in times of high uncertainty or volatility, fundaments (i.e. ROE) plays a far more important factor in determining a stock’s trading valuations than in times of more stable market sentiments/oil prices, and (ii) should market sentiment/oil prices revert positively, laggard players at lower valuations (and thus, lower ROEs) would display a higher re-rating than more fundamentally solid counters at higher valuations. That said, we identified possible laggard-play targets for bottomfishing to include: DAYANG, SAPNRG, MHB, UZMA, while names with more solid fundamentals would include: DIALOG, SERBADK, YINSON, and the staple few Petronas names.

Maintain NEUTRAL, seeing a possible pick-up in job flows to mainly come from the opex/brownfield-related space, benefiting local players such as DAYANG, UZMA, while local jobs may come in slower for fabricators, affecting players such as SAPNRG, MHB. Following our valuation-ROE study, we have made several tweaks to our calls and TPs (refer table below for more details). Overall, while some bottom-fishing opportunities may be present, many names within the sector is still plagued by balance sheet concerns and earnings instability. As such, we still find a need to be selective in terms of stock pick, preferring fundamentally more solid counters such as aforementioned DIALOG, SERBADK, YINSON, on top of staple Petronas names. Among them, we picked SERBADK as our favoured pick, on the back of its commendable track record of earnings growth delivery, coupled with its superior ROE against its peers.

Source: Kenanga Research - 3 Jan 2019

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MHB 0.855 -0.03 (3.39%) 307,400 

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