Investment Highlights

• Commendable 4QCY22 report card. Companies within our coverage delivered commendable 4QCY22 earnings with 4 companies exceeding expectations (Yinson, Bumi Armada, MISC and Deleum) while 2 were in line (Hibiscus Petroleum and Petronas Gas). Nevertheless, heavyweights Dialog Group and Petronas Chemicals Group (PChem) posted negative earnings surprises, holding back the sector’s overall performance.
  Notably, Dialog Group’s earnings continued to be plagued by persistent margin contraction in downstream engineering, construction, fabrication and plant maintenance operations, which more than offset maiden earnings contributions from its Thailand upstream asset. Meanwhile, PChem was impacted by softened petrochemical product prices due to unfavourable supply-demand dynamics and lower crude oil prices.

• Sector earnings dropped QoQ. The sector’s 4QCY22 EBITDA declined slightly by 5% QoQ to RM5.2bil while core net profit decreased at a faster 13% QoQ to RM2.9bil, largely dragged down by a substantive drop in earnings from PChem and Petronas Gas (PGas). PChem was affected by deteriorated product spreads and losses from newly-established specialty chemicals segment while (PGas) by increased operating expenses, mainly from internal gas consumption within its gas transportation operation. This more than offset the exceptionally strong QoQ increase in MISC earnings amid betterthan-expected profit margins from LNG operations and higher progress billings for Mero 3.

• Sharp rise in 4QCY22 contract awards. 4QCY22 contract awards to Malaysian oil and gas companies leapt by 5.5x QoQ to RM6bil compared to RM1.1bil in 3QCY22 (Exhibit 2), mainly boosted by a number of sizeable contracts, including (i) RM4.5bil to Malaysia Marine and Heavy Engineering’s (MMHE) for the engineering, procurement, construction, installation and commissioning (EPCIC) works at the Kasawari Carbon Capture & Storage project; (ii) RM640mil to Velesto Energy for an integrated rig charter, drilling works and completion; (iii) RM558mil to Wah Seong for the supply of an FPSO topside module; and (iv) RM322mil to Muhibbah Engineering for the EPCIC works at the Gansar project.
  However, we highlight that the sector’s job flows may taper off in the subsequent 1QCY23 given several lumpy contracts in 4QCY22. As at the end of February 2023, we estimate the combined value of YTD2023 contract awards to Malaysia oil and gas companies at RM1.8bil (30% of 4Q2022 awards).

• Resilient domestic sector outlook is here to stay. Prospects for oil and gas operators with exposure to upstream production such as Hibiscus Petroleum remain bright amid sustained oil prices of above US$80/barrel while the floating production, storage and offloading (FPSO) sub-sector also stands to benefit from the decimated number of operators following the 2015–2017 downturn. In addition, as highlighted in the Petronas Activity Outlook 2023-2025, rig operators (Velesto Energy and Icon Offshore) and platform fabricators (MHHE and Sapura Energy) are also anticipated to benefit from rising upstream activities over the next 3 years.

• Maintain full-year oil price projection of US$80-90/barrel for now. Notwithstanding prevailing expectations of softer demand for oil from a slowdown in global economic growth, we maintain our view that crude oil prices will remain elevated at US$80-90 per barrel in 2023. As a comparison, the EIA’s Short-Term Energy Outlook projects crude oil price at US$83.63/barrel for 2023 and US$77.57/barrel for 2024. Our more bullish outlook is premised on the long-lasting supply disruption induced by the Russia-Ukraine war that has triggered cascading sanctions, voluntary shunning of investments by international oil companies, substantive global supply chain disruptions and elevated risk premiums for commodities.
  Besides voluntary corporate sanctions on Russia, supply shortfall risks are persisting with major oil-exporting nations unable to ramp up production to pre-pandemic levels due to chronic under-investment over the past 5 years amid investors’ persistent energy transition-driven prerogatives. Other potential catalysts would be lower production by OPEC+ and Russia as well as China’s robust economic recovery following the relaxation of Covid-19 restrictions, which could underpin upward momentum to oil prices.

• Reiterate OVERWEIGHT on the sector. We continue to like Dialog Group on the back of its resilient noncyclical tank terminal and maintenance-based operations, as well as Yinson Holdings for its niche exposure in the exceptionally thriving FPSO sub-sector. We also like Petronas Gas, which offers highly compelling dividend yields from its optimal capital structure strategy and resilient earnings base.

Source: AmInvest Research - 8 Mar 2023