Investment Highlights

• Malaysia’s 2019 contract awards slid 6% YoY to RM11.5bil due to slower order flows in 4Q2019, which fell 35% QoQ and halved YoY to RM2.2bil. This followed multiple awards to Sapura Energy, Malaysia Marine & Heavy Engineering Holdings (MMHE) securing a RM2.5bil Kasawari central processing platform job and Bumi Armada’s 30% stake in ONGC’s KG-DWN 98/2 FPSO charter in the previous quarter. In our view, the slower order flows could be temporary given that award timelines tend to be lumpy in the first and fourth quarters of the year. Over the longer term, offshore projects in Brazil, Mexico, the Middle East and West Africa are poised to regain traction with Sapura Energy and MMHE 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. 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.

• Higher asset utilization is still driving up charter rates despite the softer 4Q2019 award rollout. After 4 years of low charter rates, recovery in asset utilisation 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. In November last year, Velesto Energy secured a fresh charter at sharply higher daily rates of US$90–100k for its Naga 8 jack-up rig from Carigali Hess Operating Company for a firm 3-year period with 3 extension options of 6 months each to be deployed at Block A-18 of the Joint Development Area administered by the Malaysian-Thailand Joint Authority. This is 29%– 32% higher than the US$70K–US$76K for Velesto’s 4 fresh jack-up rig charters which were secured in April last year.

• Petronas’ 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 in Johor, which has reached a completion stage of 99.8%. However, international spending has accelerated at a faster pace, which led to the proportion of overseas projects rising to 54% in 3Q2019 from 44% in 3Q2018. Nevertheless, 3Q2019 domestic spending still increased by 39% QoQ and 29% YoY to RM6bil, which supports our view of a gradually rising capex trend. This is underpinned by Petronas’ 2019–2021 Activity Outlook, which projects a gradual improvement in the utilization of rigs, vessels, pipeline/offshore installations this year. Given that 9M2019 capex has risen by 9% YoY to RM29bil, we expect a continuation of the upward momentum this year.

• Extending our 2020 crude oil forecast of US$60–US$65/barrel to 2021. Following the decision by OPEC and its partners to cut production quotas by an additional 500,000 barrels on 1 Jan 2020 to 2.1mil barrels amid expectations of the US and China entering into the first phase of a trade deal, Brent crude oil prices have remained above US$60/barrel over the past month with the 2019 average at US$64/barrel. With US crude inventories sliding by 2% to 441mil barrels since mid-November against the backdrop of Saudi Aramco’s recent listing, we extend our 2020 price forecast of US$60–65/barrel to 2021. 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$61/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. Our fair value for Serba Dinamik has been adjusted to RM3.00 from RM6.50 due to the recent 1-for-2 share split, 2-for- 5 bonus and 881mil free 5-year warrants at exercise price of RM2.62.

• Risks remain due to high volatility. Given the high volatility in global crude prices, we may downgrade to sector to NEUTRAL due to: 1) higher-than-expected production from US shale, Brazil and other growing producers; 2) slower-thanexpected global economic growth against the backdrop of worsening trade tensions; 3) accelerated adoption of fuel-efficientcum-electric vehicles that could reduce consumption and lead to “peak oil demand”; 4) non-compliance by OPEC members to their agreed quotas, which will again lead to aggressive measures to regain market shares; and 5) increasing exit from oil and gas stocks by ESG-compliant global funds.

Source: AmInvest Research - 3 Jan 2020