Investment Highlights

• The ‘great reset’ in motion. Petronas National’s (Petronas) newly released Activity Outlook for 2021 to 2023 provides detailed guidance for its activities over the next 3 years even as the group repositions for the ‘great reset’ following the impact of the unprecedented Covid-19 pandemic and uncertainties in Opec production cuts amid the global energy transition towards net zero carbon emission targets. Hence, the group will prioritise cost efficiencies and technology-driven productivity while de-risking its portfolio by pivoting towards faster cash-generating investments with less volatile profiles. Petronas will also encourage local players to move towards digitalisation and renewable energy solutions.

Even though the proportion of renewable energy to global demand will increase by 5% from 2019 to 15% in 2030 mostly from the decline in coal usage, we highlight that oil & gas will still account for the bulk with 54% (Exhibit 4) given the rising prominence of gas consumption which has a lower carbon footprint.

• O&G activities in recovery cycle. Based upon the guidance provided by Petronas, we note that the domestic sector will gradually recover from:
  • Rising engineering, procurement, construction, installation and commissioning (EPCIC) activities

1. 4 greenfield projects involving 3 gas and 1 oil developments are in the engineering phase this year, while 5 (East Cendor Phase 1, Bergading Deep Phase 3, Bakau, Pegaga & Pemanis) will be completed this year with the ongoing Kasawari central processing platform (CPP) slated for completion in 2H2023. Additionally, a brownfield gas project with new installations will commence fabrication in 2Q2021 (Exhibits 4 & 5). We expect the involvement of fabricators such as Sapura Energy and Malaysia Marine & Heavy Engineering Holdings.
2. The number of heavy installation barges to lift well-head platforms, topsides and CPPs surges to 12 this year from just 2 last year (Exhibit 8) as 1 project was delayed due to the MCO.
3. Pipeline installations growing by 4.2x from 64 days in 2021 to a base case of 266 days in 2023 as more development projects tie in to existing platforms or processing facilities (Exhibit 9).
4. Decommissioning of wells increases to 18 this year from 15 in 2020, which will rise further to 24 in 2022 and expand to remove 51 conductors, 2 floaters and 1 fixed platform (Exhibit 12). Currently, 56% of Petronas’ 350 facilities are operating beyond the assets’ design life, 38% of the 750 pipelines while 45% of the 3,000 wells are idle with over 500 wells expected to be permanently plugged by 2030.

We note that Sapura Energy’s integrated service platform is well positioned to secure these jobs given the group’s underutilised heavy installation vessels currently, while former local EPCIC players such as Barakah Offshore Petroleum are still under PN17 status.

• Turnaround activities rise to 11 onshore plants in 2021 vs. only 7 last year, as 2 were deferred due to MCO (Exhibit 15). This will benefit operation and maintenance providers like Dialog Group and Serba Dinamik.

• Higher vessel demand to support drilling and projects, rising to 172 this year from 141 in 2020 should support operators such as Icon Offshore, Perdana Petroleum and Alam Maritim Resources. Even so, this still represents a 33% decrease from the earlier 2020 plan for 256 vessels (Exhibit 17) notwithstanding Petronas’ prioritisation of local ships. However, vessel requirement to support production operations are relatively flat YoY at 131 vessels this year.

• The number of rigs expected to rebound to 22 in 2021 from 14 in 2H2020 due to plummeting oil prices and movement control order (MCO) (Exhibit 10). While this is below the earlier 2020 target of 26 rigs, we expect Velesto Energy to experience improving asset utilisation towards the second half of the year.

• Some segments could still struggle as hook-up & commissioning activities will decline this year by 20% YoY to 3.5mil man-hours due to resource limitation and Petronas’ optimisation plan to “uberise” marine vessels onto a single digital platform (Exhibit 11). Likewise, offshore maintenance & construction is expected to decline by 10% YoY to 10.1mil man-hours (Exhibit 13). Hence, Dayang Enterprise’s recovery could be slower than players servicing different value chains.

• Sluggish order flows in 4Q2020. Excluding Serba Dinamik’s huge civil and ICT jobs in the UAE, new contract awards in 2020 for Malaysian operators fell 42% YoY to RM6.6bil. However, including Serba’s lumpy UAE projects, the 2020 new orders instead rose 38% YoY to RM15.8bil. New project rollouts were still sluggish in 4Q2020, as fresh jobs fell 32% YoY to only RM1.5bil. Nevertheless, we note that this was still better than the 3-year low of RM569mil in 1Q2020, which could mean that the worst of the Covid-19 impact is behind us.

• Raise oil price forecast to US$50–55/barrel for 2021 and slightly higher to US$55–60/barrel for 2022. Brent crude oil prices have averaged US$42/barrel in 2020, well within our expectations with spot prices at US$51/barrel currently from the low of US$14/barrel on 22 April 2020. This is supported by US crude oil inventories declining by 9% to 493mil barrels currently from the all-time high of 541mil barrels in June last year.

Hence, we raise our crude oil price forecast by US$5/barrel to US$50–US$55/barrel for 2021 and slightly higher to US$55– 60/barrel for 2022 on expectation of a 2H2021 global economic recovery underpinned by the Covid-19 vaccine. For comparison, the EIA’s Short-Term Energy Outlook has just revised its Brent crude oil price projection by almost US$2/barrel to US$49/barrel for 2021.

• Maintain OVERWEIGHT with 7 BUY calls vs. only 1 HOLD. With Brent crude spot prices stabilising above US$50/barrel, we believe that the down cycle has reached a bottom with the worst experienced in April last year when Brent spot plunged to a low of US$14/barrel while futures inverted to an abnormal negative value due to lack of storage capacity.

We continue to like Yinson as its earnings growth momentum from the maiden contributions of FPSO vessels Helang, off Sarawak, Abigail-Joseph in Nigeria and Anna Nery in Brazil together with multiple charter opportunities in Brazil and Africa. We like Petronas Gas, as the group’s optimal capital structure strategy and resilient earnings base translate to highly compelling dividend yields.

We also recommend Dialog Group and Serba Dinamik Holdings due to their resilient non-cyclical tank terminal and maintenance-based operations. We also like Sapura Energy, which will complete its RM10bil debt restructuring package this month and position the EPCIC group to secure the increase in global orders.

Source: AmInvest Research - 4 Jan 2021