Kenanga Research & Investment

Author: kiasutrader   |   Latest post: Thu, 4 Jun 2020, 8:53 AM


Oil & Gas - Contracts Flow Expected to Improve

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Brent crude oil prices have been hovering at around the USD70-80/bbl level of late, up from the USD50/bbl level a year ago, on the back of OPEC-led production cuts and U.S. reimposing sanctions on Iran, while data has also shown that most of 2018 have been in a supply-deficit situation. All-in, we foresee oil averaging at around USD75/bbl for 2018-2019. However, this has yet to cascade down to contract flows towards local oil and gas players. YTD-Sept, 36 contracts were announced - staying flat compared to last year, and still vastly lower than 3-4 years ago. That said, we expect gradual recovery over the next 1-2 years as oil majors regain sufficient comfort in dishing out jobs. Naturally, top names that first come to mind would be companies with direct E&P exposure (e.g. SAPNRG, REACH, HIBISCS), while UZMA and DAYANG could also benefit from greater work orders from increased brownfield production. Meanwhile, YINSON should also be well-positioned to benefit from an improving FPSO market. Overall, we maintain our NEUTRAL view on the sector, albeit with some positive biasness. We select SERBADK as our top-pick, given its: (i) consistent earnings delivery, (ii) dynamic expansions into new regions, and (iii) superior ROE compared to peers.

Brent crude oil breached USD80/bbl. OPEC-led collaborative production cuts have resulted in a more stabilised oil price environment, with Brent crude oil hovering at around the USD70-80/bbl level recently, as compared to around the USD50/bbl a year ago. While some declines in emerging market currencies earlier in the year may have contributed to increased concerns regarding the global economic growth, and hence, oil demand, this was offset by the re-stating of U.S. sanctions on Iran, leading to further supply-side constrains and driving crude prices to breach the USD80/bbl-mark in late-Aug to reach a four-year high. In fact, studying U.S. EIA’s supply and demand data, we found that oil production has mostly been in a supply-deficit (i.e. demand > supply) for most of 2018. From here, we may look towards the upcoming OPEC’s meeting in early-December, where we firmly believe OPEC would reiterate its stance of production-cut compliance. All-in, we foresee crude oil prices averaging at around USD75/bbl for 2018-2019.

Contracts flow yet to reflect improved oil prices. Despite the stabilising oil prices, this has not been reflected in any strong recovery in contracts flow towards local oil & gas players. YTD-September, we have seen a total of 36 contracts were announced among local listed oil and gas players, identical to last year’s corresponding period. Comparatively, contracts flow was at >100 per year during 2013-2014 when oil prices were >USD100/bbl, and even in 2015 after the plunge of oil prices, 96 numbers of contract were announced. With all that said, we believe contracts flow should gradually recover over the next 1-2 years as oil majors regain sufficient comfort in dishing out jobs amidst the stabilising oil prices. More particularly, we expect to see an increase in work-order based contracts (e.g. maintenance or umbrellabasis contracts) as oil producers may choose to increase production in brown fields to immediately capitalise on the higher oil prices. Meanwhile, green field-based projects (e.g. exploration or new-oil production based jobs) could see a lagged surge given its huge capex nature and drawn-out planning process.

Possible beneficiaries. Naturally, top names that come to mind as immediate beneficiaries of a higher oil price environment include those with direct E&P exposures such as SAPNRG (MP, cum/ex-TP: RM0.41/RM0.34), REACH (Not Rated) and HIBISCS (Not Rated). Meanwhile, UZMA (OP, TP: RM1.65) could also benefit from its position in the well-intervention space should we see an increase in brown field production. In fact, based on our correlation study, UZMA has actually shown to have one of the more consistent positive correlations over 10-year, 5-year and 3-year periods among our oil and gas coverage universe. DAYANG (OP, TP: RM0.98) could also benefit from an increased number of maintenance work orders given that many of them have been deferred previously during times of low oil prices. Elsewhere in the green field space, we also favour YINSON (OP, TP: RM5.00) to benefit from an improving FPSO-market underpinned by the increased number of green field investments globally.

Maintain NEUTRAL, albeit with positive biasness. While we are leaning towards a slightly more positive outlook for the oil and gas sector, we have rationalised some of our calls during the recently-ended quarter, thus seeing 7 downgraded calls (out of 16 stocks) within our coverage. Several players are still saddled by debt-related issues (e.g. ALAM, ARMADA, SAPNRG), while some others are still expected to show volatile earnings for now. That said, postrationalisation, we are fairly confident in the remaining OUTPERFORM calls that we have, given that they are quality names with growth potentials and are backed by solid fundamentals. Among all, we have selected SERBADK (OP, TP: RM4.45) as our top-pick, given its: (i) promising growth and consistent earnings delivery, (ii) dynamic expansions into new regions through organic and inorganic growth, and (iii) superior ROE against many of its peers.

Source: Kenanga Research - 3 Oct 2018

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03/10/2018 11:40 PM
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