Investment Highlights

• Mixed 4Q2018 results. Following the disappointment of 3Q2018 results, the 4Q2018 report card was better in the sense that two of the loss-registering companies under our coverage – Bumi Armada and Velesto Energy – surprised us by delivering lower losses than expected. As such, the number of underperformers halved QoQ to 2 with weak results from MISC due to a lower-than-expected tanker rebound while Petronas Gas suffered from its associate Kimanis Power’s derecognition of deferred tax assets together with higher maintenance costs and depreciation charges.

• Core net profit rose 13% QoQ in tandem with sector revenue growth of 8% largely from the seasonal rebound in MISC’s petroleum tanker charter rates together with higher construction vessel utilisation and cost reductions at Sapura Energy. Further supported by stronger bottom lines from Dialog Group, Serba Dinamik, Velesto and Yinson, the sector EBITDA margin improved by 1.7ppts QoQ, to 39.5% (see Exhibit 5).

• Unresolved balance sheet risks in the sector. While the results have largely improved from seasonal factors, balance risks linger as Bumi Armada’s attempts to renegotiate its unpaid US$380mil debt have been deferred to the next quarter from 1Q2019, which raises prospects of a highly dilutive equity-raising exercise amid a depressed share price. If financiers were to initiate liquidation proceedings against one of the more globally recognised O&G players, we expect further derating of the sector, even though peers such as Sapura Energy and Velesto have managed to successfully execute their recapitalisation programmes.

• Maintain 2019 crude oil forecast at US$65–70/barrel. With US crude inventories up 13% since September last year and Brent crude prices averaging US$61/barrel to date, we maintain 2019 price forecast at US$65–70/barrel. As a comparison, the EIA is projecting US$61/barrel for 2019 and US$62/barrel for 2020, with US daily production projected to increase by 22% since the beginning of 2018 to an all-new record of 12mil barrels in January this year, almost within reach of the EIA’s forecast of 12.4mil barrels for 2019. US production is expected to grow further by 6% to 13.2mil barrels next year.

• Still expect moderate recovery in Petronas’ upstream capex rollout. As Brent crude oil prices at over US$60/barrel are still above Petronas’ 2018 internal crude oil assumption of US$52/barrel for project feasibility studies, we do not expect any substantive changes to its field development activities. We expect a moderate recovery in domestic rollouts as the group has introduced new fiscal term enhancements involving self-adjusted cost recovery and a profit-sharing mechanism based on revenue over cost index for new deepwater production sharing contracts to attract new exploration investments and to open new fields in Malaysia.

• Contract awards still on upward trajectory. Despite the ongoing oil price volatility, we have not seen any impact yet on the upward contract award trajectory with Malaysia’s 2018 contract awards rising 54% YoY to RM11.6bil due to the award of Pan Malaysia umbrella contract renewals, Sapura Energy securing the EPCIC work for the Pegaga CPP and Serba Dinamik’s EPC and O&M jobs. Offshore projects in Brazil, Mexico, the Middle East and West Africa may be still poised to gain traction with Sapura Energy and MMHE recently being selected for Saudi Aramco’s Long Term Agreement programme, which allows them to bid for the kingdom’s massive offshore projects that could reach US$150bil over the next 10 years.

• We are NEUTRAL on the sector given the volatility in the oil price direction over the next 6 months, unresolved US-China trade dispute, deteriorating global economic growth outlook and easing of US pipeline constraints. Our top picks are still companies with stable and recurring earnings such as Dialog Group, Serba Dinamik and Yinson. We like the recurring income business model of Dialog and Serba Dinamik, which are involved in operation and maintenance services. Dialog’s earnings visibility is further secured by the Pengerang Deepwater Terminal project with its enlarged buffer zone while Yinson may secure another major FPSO contract next year. We maintain a SELL for Petronas Gas due to the longer term impact from the progressive reduction in its transportation tariffs under the Energy Commission’s new guidelines.

Source: AmInvest Research - 5 Mar 2019