Investment Highlights

• RM6bil MCM job award soon. The Edge reported that Petroliam Nasional (Petronas) has conducted a pre-award meeting for its maintenance, construction and modification (MCM) jobs, which could be valued collectively up to RM6bil. The work scope covers hook-up and commissioning and topsides maintenance for Petronas and possibly other operators; principally on existing production facilities.

• Delayed award. Upstream reported that this MCM tender has been ongoing for some time, but was earlier expected to have been awarded in 2Q2017. Petronas' recent focus on reshuffling its upstream portfolio amid a review of its capital and operating expenditure against the backdrop of a lower crude oil price environment has negatively impacted the local services sector. It is uncertain whether Petronas would split the MCM jobs into 6 packages for a 5-year duration as earlier envisaged.

• Dayang, Sapura Energy and Deleum may be clinching the deals. The Edge indicated that Dayang may be on the verge of securing the contract to maintain oil platforms in Sarawak, Sapura Energy the gas portion in Sarawak while Deleum a portion in Peninsular Malaysia. Dayang and Petra Energy are the incumbent contract holders. Other potential candidates could be Petra Energy, Carimin Petroleum, Icon Offshore and privately-held Borneo Sea Offshore Engineering. Deleum is understood to be working closely with Icon Offshore to use its vessels for this project.

• Not likely to catalyse the market. Essentially, these new contracts, which are a relief for the sector, are to replace the existing service jobs currently held by the incumbents. These could offer a respite for vessel utilisation rates. However, in terms of value accretion, we do not expect any significant increase in day rates given the currently depressed offshore market.

• Persistent low asset utilisation levels expected for the medium term as we do not expect any significant change in Petronas’ cautious approach to upstream exploration and development expenditures. For 2Q2017 to date, contract awards have risen by 15% QoQ RM2.2bil largely due to the lumpy award of the RM1bil Bokor central processing platform project to MMHE. For Malaysian operators, which operate wholly offshore, weak capex rollout prospects mean that the worst can stretch for quite a while for those struggling with high gearing such as Bumi Armada and UMW Oil & Gas. Locally-based companies such as Perisai Petroleum Teknologi, Alam Maritim and Nam Cheong Group are currently in financial distress.

• Most of Petronas’ capex spent on RAPID. Petronas’ capex declined 21% QoQ to RM9.4bil in 2Q2017, which led to a decrease of 15% YoY to RM21.3bil in 1H2017, of which 59% was spent on the US$27bil Refinery and Petrochemical Integrated Development (RAPID). RAPID has reached a completion stage of 70%, compared to only 20% for exploration and development. So far, the 1H2017 capex spending accounts for only 35% of the RM60bil guided by Petronas for this year with average Brent crude oil prices assumed at US$45/barrel.

• Supply-demand imbalance persists. For the sector, we do not expect any immediate rebound in crude oil prices given the persistent supply-demand imbalance. As at 18 August, US crude oil production stubbornly continues to rise, up 8% since the beginning of the year to 9.5mil barrels/day, largely offsetting the 13.5% decline in commercial crude inventories since 31 March this year to 463mil. US rig count has dropped by 12 rigs since the end of last month to 946 rigs, up 2.3x from the May 2016 low of 404, with the trajectory remaining upwards as this is still half of the 2011 peak of 2,026.

• Flat oil price forecast for 2017-2018. As Brent crude oil spot has averaged at US$52/barrel since the beginning of this year, we maintain our 2017-2018 projection at US$50-55/barrel. As a comparison, Petronas is projecting an average of US$45/barrel for 2017 while the EIA forecasts US$52.60/barrel for 2017 and US$57/barrel for 2018. We remain cautious on the sector given the unabated increase in shale oil production highlighted by the rising US rig count, which has surged 2.2x since the all-time low in May 2016 to 908. The capacity for fleet expansion is still significant as this US rig count accounts for less than half of the 30-year high of 2,031 back in 2008.

• Maintain NEUTRAL stance as the prospects of the sector over the next 12 months are muted given that the direction for crude oil price appears to be “lower for longer”. Our top picks are companies with stable and recurring earnings such as Dialog Group and Yinson Holdings. Dialog’s earnings visibility is secured largely by the Pengerang Deepwater Terminal project with its enlarged buffer zone while Yinson’s Ghana floating production, storage and offloading vessel project will provide the earnings momentum over the next 2 years. Our HOLD calls are for Sapura, MISC, MMHE, Bumi Armada and UMW Oil & Gas while Petronas Gas is a SELL due to the upcoming implementation of the incentive-based regulatory tariff setting mechanism.

Source: AmInvest Research - 18 Sept 2017