Investment Highlights

• Largely in line 3Q2019 performance. The results of the companies under our coverage were largely in line with expectations as 5 of the 8 companies under our coverage came within expectations, vs. 2 outperformers and 1 underperformer. Velesto Energy registered a surprisingly strong 3QFY19 net profit from a rig utilization of 92% with only one rig undergoing mandatory maintenance while Dialog Group enjoyed expanded plant turnaround and maintenance revenues from Petronas’ 5-year master service agreement. As in the previous quarter, Sapura Energy disappointed notwithstanding a slightly lower loss stemming from minimal early-cycle fabrication margins derived from the huge central processing platform jobs for Sarawak’s Pegaga and India’s KG-DWN 98/2 NELP blocks amid a crude oil price decline.

• Core net profit decreased 14% QoQ to RM1.1bil largely due to MISC’s higher drydocking activities, offshore demobilisation costs and lower ancillary services, Petronas Gas’ incentive-based regulatory tariff adjustments and Serba Dinamik’s lower seasonal revenue. The sector’s 3Q2019 EBITDA margin decreased 5ppt QoQ to 35% even though revenue QoQ increased 5% to RM8bil largely due to lower contributions from MISC, Petronas Gas and Sapura Energy (see Exhibit 3). Nevertheless, the sector’s earnings remain on an upward trajectory as on a YoY comparison, core earnings rose 20% from improved performance of most of the companies.

• Higher asset utilization is finally moving charter rates. After 4 years of low charter rates, a recovery in asset utilization has begun to drive up charter rates for rigs and vessels in tandem with rising offshore activities. Rig charter rates are beginning to track upwards on tightening utilization rates to near 70% while older rigs are being retired amid slowing new units from China yards. Early last month, Velesto Energy secured a fresh charter at sharply higher daily rates of US$90–100K for its Naga 8 jackup rig from Carigali Hess Operating Company for a firm 3-year period with 3 extension options of 6 months each to be deployed at Blck A-18 of the Joint Development Area administered by Malaysian-Thailand Joint Authority. This is 29%–32% higher than the US$70K–US$76K for Velesto’s 4 fresh jack-up rig charters worth US$105mil (RM432mil) which were secured in April this year.

• Capex spending rebounded by 78% QoQ and 59% YoY. Petronas’ 3Q2019 capex rebounded by 78% QoQ and 59% YoY to RM13bil largely from upstream projects against the backdrop of the dwindling tail-end development of the US$27bil Pengerang Integrated Complex (PIC) in Johor, which has reached a completion stage of 99.8%. This is underpinned by Petronas’ 2019– 2021 Activity Outlook, which projects a gradual improvement in the utilisation of rigs, vessels, pipeline/offshore installations next year.

• Malaysia’s 9M2019 contract awards rose 14% YoY to RM9.2bil following a lull in 1Q2019 and driven by multiple awards to Sapura Energy and Malaysia Marine & Heavy Engineering Holdings (MMHE) which secured a RM2.5bil Kasawari central processing platform job, while Bumi Armada secured a 30% stake in ONGC’s KG-DWN 98/2 FPSO charter. While 3Q2019 job orders rose 76% YoY to RM3.4bil, these were down 15% QoQ. Westwood Global Energy Group is projecting global drilling and well services expenditure to grow 19% to US$1.9tril for 2019–2023 from 2014–2018.

• Maintain our 2019–2020 crude oil forecast to US$60–US$65/barrel amid high volatility. Following the surprise disruption to Saudi Arabia’s production from drone attacks purportedly launched by Iran-backed Yemeni Houthis in September this year, Brent crude oil prices have remained above US$60/barrel with the YTD 2019 average at US$64/barrel. With US crude inventories rising by 9% to 452mil barrels since early September, we maintain our 2019–2020 price forecast to US$60-65/barrel from US$65–US$70/barrel. Since the beginning of 2019, the EIA’s Short-Term Energy Outlook has continuously revised its crude oil projections, moving its Brent oil projection between US$60/barrel and US$70/barrel and currently settling at US$64/barrel for 2019 and US$60/barrel for 2020.

• We maintain OVERWEIGHT on the sector as prospects have radically brightened with rising asset utilization globally which supported service providers’ improving results. While we have BUY calls for MISC, Sapura Energy and Velesto Energy, our top picks are still companies with stable and recurring earnings such as Serba Dinamik and Dialog Group. We like the recurring income business model of Dialog and Serba Dinamik, which are involved in operation and maintenance services while Dialog’s earnings visibility is further secured by the Pengerang Deepwater Terminal project with its enlarged buffer zone.

Source: AmInvest Research - 2 Dec 2019