Investment Highlights

• Balanced 3QFY23 report card. Companies within our coverage delivered a balanced performance for the 3Q2023 earnings season with 63% (5 out of 8) of companies within our expectations, namely Bumi Armada, Deleum, Dialog Group, MISC and Petronas Gas (Exhibit 2). Notably, Petronas Chemicals delivered weaker-than-expected earnings due to persistently weak petrochemical product prices and lower plant utilisation rates, presenting a drag on overall sectoral performance.
  
  Meanwhile, Hibiscus Petroleum and Yinson’s performance was above our expectations. This was driven by higher oil sales offtakes and at stronger prices for Hibiscus and stronger recognition from floating production, storage and offloading (FPSO) vessel conversion and engineering, production, construction and commissioning (EPCC) work for Yinson.

• Flattish QoQ sectoral earnings. 3Q2023 core net profit was flattish at RM1.9bil (-1.1% QoQ), in tandem with topline performance which came to at RM17.1bil as the weaker contribution by by sector heavyweights MISC, Petronas Gas and Petronas Chemicals was offset primarily by Bumi Armada, which saw the return of earnings contribution from charter revenues for FPSO Armada Kraken coupled with Hibiscus Petroleum outperformance, which collectively makes up 18% of sector earnings (vs. 7% in 2QFY23) (Exhibit 4).

• Sharp sequential decline in oil and gas contract awards. We note that 3Q2023 contract awards to listed Malaysian oil and gas companies, based on our tracking, halved mainly due to the non-recurrence of lumpy contract awards in the previous quarter. We also note the significant amount of contract awards for the provision or extension of maintenance, construction, and modification (MCM) works whose contract values are not disclosed as they are on a purchase order basis, particularly for Dayang Enterprise. We expect to see seasonally stronger contract flows in 4Q2023, broadly in line with Petronas’ historical quarterly capex spending trends (Exhibit 6). Recall Petronas’ target to spend RM300bil of capex over the next 5 years, translating into an annual capex of RM60bil, which implies a vigorous pipeline of projects to be dished out by the national oil company.

• Resilient outlook for offshore equipment and service providers. Prospects for offshore equipment and service providers, including FPSO players, are expected to remain resilient, supported by strong momentum in offshore developments and activities. In addition, as highlighted in Petronas Activity Outlook 2023-2025, rig operators such as Velesto Energy and Icon Offshore as well as platform fabricators such as Malaysia Marine and Heavy Engineering and Sapura Energy are anticipated to benefit from rising upstream activities over the next 3 years.

• Maintain brent crude oil price forecast of US$83/barrel for 2023F and US$90/barrel for 2024F. As a comparison, the EIA’s Short-Term Energy Outlook projects crude oil prices at US$84/barrel for 2023F and US$93/barrel for 2024F. We continue to see a tight supply market towards the end of the year from voluntary production cuts by OPEC+ of almost 2.5mil bpd. This is also supported by a strong demand environment as China’s recovery has been more resilient than expected, leading Rystad Energy to increase its 2023F demand growth to 2.5mil barrels per day (bpd) in October (vs. 2.1mil bpd previously) with no signs of weakening in 4Q2023.
  
  Additionally, OPEC+ had recently (30-November) announced production cuts of 2.2mil bpd for 1Q2024, which includes the extension of existing voluntary cuts by Saudi Arabia and Russia of 1.3mil bpd. This brings the total pledged cuts since late 2022 to 5.86mil bpd which represents 5.7% of global oil demand.

• Maintain OVERWEIGHT on the sector. Our top picks for the sector remain Dialog Group (BUY, FV: RM3.46) which is supported by its resilient non-cyclical tank terminal and maintenance-based operations; and Yinson (BUY, FV: 3.96), the primary beneficiary of the FPSO upcycle. We also like Petronas Gas (BUY, FV: 19.97), which offers a decent dividend yield of 4.7%, which can be raised further from the optimisation of its capital structure together with sustainable recurring earnings for its gas transportation and processing operations.

Source: AmInvest Research - 11 Dec 2023