Investment Highlight

• Mixed report card. The FY21 earnings delivery of the 8 companies under our coverage was mixed with 5 in line vs. 2 disappointment. The sole outperformance came from Hibiscus Petroleum which enjoyed higher realised crude oil prices. Sapura Energy continued to disappoint due to huge loss provisions from slower fabrication activities and impairments amid Covid-19 restrictions.
  The other underperformer, Bumi Armada, bore higher lumpy operational and maintenance costs from Armada Olombendo and impairments from vessels earmarked for disposal. As a comparison, there was only an outperformer and a disappointment in 3Q2021.

• Stronger sector core net profit. In 4QFY21, the sector’s EBITDA rose 20% QoQ to RM4.7bil while core net profit rose 36% QoQ to RM2.6bil largely due to sharply reduced loses from Sapura Energy (Exhibit 3). This slightly improved 4QFY21 EBITDA margin by 0.7% point to 31%. However, excluding Sapura Energy’s results, 4QFY21 EBITDA and core net profit would have been reduced by 4%–5% from Petronas Gas’ higher year-end operating costs and internal gas consumption.

• Balance sheet risks persist on asset-heavy companies. Notwithstanding the significantly improved crude oil price scenario, asset-heavy companies such as Sapura Energy, Velesto and Alam Maritim Resources are still struggling with heavy debt shouldered from past acquisitions during the pre-2014 uptrend. While Sapura Energy’s RM7bil short-term debt was reclassified back to long-term debt after receiving the banks' waiver from a breach of debt covenants, this issue could reemerge by this year given negative EBITDA prospects for the full year.

• Slow 4Q2021 award of fresh fabrication jobs. The sector’s contract awards in 4Q2021 to Malaysian oil & gas operators rebounded 3.5x YoY to RM5.3bil (Exhibit 2), largely from a lumpy RM4.5bil contract to Coastal Contracts involving the construction of an onshore gas sweetening plant in Mexico.
  Excluding this contract, 4QFY21 orders would have been halved YoY as fabrication jobs awards remain weak amid the rising cases of Covid-19 Omicron variant globally. Meanwhile, major fabricator Sapura Energy continued to suffer from liquidity concerns which hampers the group’s capacity to secure fresh jobs from Petronas and other multinationals.

• Better prospects of selected segments. We expect selected segments in the value chain to be better positioned to benefit from higher oil prices and projects sanctioned by national oil companies. Operators directly exposed to upstream production such as Hibiscus Petroleum and the floating production storage and offloading (FPSO) sub-sector stand to benefit given the decimated number of operators during the previous downturn in 2015-2017.

• Maintain Brent oil price projection at US$90–95/barrel for 2022 and US$80-85/barrel for 2023. As Brent oil prices have crossed US$110/barrel, we expect crude oil prices to remain elevated from the uncertain geopolitical impact from Russia’s surprising invasion of Ukraine that has triggered cascading sanctions, voluntary shunning of investments by international oil companies, substantive global supply chain disruptions and elevated risk premiums for commodities. Supply shortfall risks are escalating with major oil exporting nations unable to ramp up production to pre-pandemic levels due to chronic underinvestment over the past 5 years amid investors’ persistent energy transition-driven prerogatives. However, we expect oil prices to soften next year as an inflationary regime could dampen global demand while spurring fresh investments in the sector and raise production expectations.
  As US inventories have tumbled 17% from the YTD peak of 502mil barrels on 26 March 2021 to below pre-pandemic levels at 413mil barrels presently (8% below 2019 average of 448mil barrels), our Brent crude oil price projections are currently higher than the EIA’s revised Short-Term Energy Outlook of US$83/barrel for 2022 and US$68/barrel for 2023. Downside risks stem from an amicable resolution to the Russia-Ukraine conflict, the emergence of new vaccine-resistant viral variants, the possibility of Iranian crude re-entering the global market and significant rebound in US shale production.

• Maintain OVERWEIGHT rating on the sector as escalating crude oil prices and rising global demand will catalyse faster order flows across the value chain. We continue to like Hibiscus Petroleum’s direct upstream exposure to higher crude oil prices and Dialog Group’s expanding, yet resilient non-cyclical tank terminal and maintenance-based earnings base. Meanwhile, Petronas Gas offers highly compelling dividend yields from its optimal capital structure strategy and resilient earnings base.

Source: AmInvest Research - 3 Mar 2022