AmInvest Research Reports

OIL & GAS - 1QFY24 Results Wrap-Up – Better Days Ahead Still

AmInvest
Publish date: Thu, 13 Jun 2024, 10:36 AM
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Investment Highlights

  • Balanced 1QFY24 report card. Companies in our coverage delivered a balanced performance during the 1Q2024 earnings season with 63% (5 out of 8) of the companies coming in within our expectations. These were Bumi Armada, Deleum, Dialog Group, Petronas Gas and Yinson . Petronas Chemicals delivered weaker-than-expected earnings again due to persistently low petrochemical product prices. This presented a drag on overall sectoral performance, which would have otherwise seen a +10pts improvement. The improvement would have been more reflective of the strong outlook momentum currently seen in the sector.

    Hibiscus Petroleum and MISC’s performances were above expectations. This was driven by higher oil sales offtakes, stronger prices for Hibiscus and a better-than-expected recovery in MISC’s heavy engineering segment as legacy contract nears the end of its construction period.
  • Slightly encouraging sequential earnings for the sector, a sign of recovery from a low base. 1Q2024 core net profit (CNP) rose by 11% QoQ to RM2.5bil , despite a flattish topline as Petronas Chemicals nearly doubled its earnings from a low base. Recall that the company experienced a double whammy from 2Q to 4Q2023 due to multiple unscheduled plant shutdowns and weak petrochemical product prices. We understand that the planned plant shutdowns for 2024F are within expectations for now and also, product prices in the Olefin and Derivative (O&D) and specialty chemicals segments are envisaged to be stronger this year.
  • Biggest winners for 1Q2024 contract awards - Velesto, Dayang and Perdana. In our quarterly tracking, we find that contract awards were still dominated by 1-year work order extensions for local listed Malaysian oil and gas companies. We gather that this is due to the backlog of maintenance works attached to the Pan-Malaysia maintenance, construction, and modification (MCM) contracts signed in 2019 . These contracts were structured on a call-out basis. We expect contract flows to be quieter in 2Q2024, as most of the works have been extended until end-2024. Recall that Petronas’ target to spend RM300bil of capex in the next 5 years translates into an annual capex of RM60bil, which implies a vigorous pipeline of projects to be dished out.
  • Resilient outlook for offshore equipment and service providers. Prospects for the offshore equipment and service providers, including FPSO players, are 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 as well as platform fabricators such as Malaysia Marine and Heavy Engineering and Sapura Energy are anticipated to benefit from rising upstream activities in the next 3 years.
  • Maintain Brent crude oil price forecast of US$85/barrel for 2024F. In comparison, the EIA’s Short-Term Energy Outlook projects crude oil prices at US$84/barrel for 2024F and US$85/barrel for 2025F. 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.

    Though we are cognizant of the recent signals by OPEC+ that it may end production cuts of 2.2mil bpd for by end-2024F (including the extension of existing voluntary cuts by Saudi Arabia and Russia of 1.3mil bpd), we have not imputed this in our forecasts as the organization has yet to commit to a programme.
  • Maintain OVERWEIGHT on the sector. Our top picks are Dialog Group (BUY, FV: RM2.91) which is supported by its resilient non-cyclical tank terminal and maintenance-based operations; and Yinson (BUY, FV: 4.02), the primary beneficiary of the FPSO upcycle. We also like Petronas Gas (BUY, FV: 19.97), which offers a decent dividend yield of 5.4%. We believe that Petronas Gas can raise its dividend payments further due to the optimisation of its capital structure and sustainable recurring earnings from the gas transportation and processing operations.

Source: AmInvest Research - 13 Jun 2024

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