Investment Highlights

• Improved 4Q2017 report card. The 4Q2017 results for the 8 stocks under our coverage improved as 4 companies exceeded expectations vs. 3 in the previous quarter. Higher-than-expected margins from its Ghana-based FPSO drove Yinson’s bottomline, Malaysia Marine and Heavy Engineering Holdings (MMHE) benefited from lumpy change orders and positive tax charge, Dialog Group was supported by higher margin recognition from the Phase 2 Pengerang Deepwater Terminal project construction cycle and commencement of its 25%-owned regassification plant while UMW Oil and Gas (UMWOG) was supported by higher rig utilisation rates. Three companies – MISC, Bumi Armada and Petronas Gas – were within expectations while Sapura Energy’s disappointing loss stemmed from low asset utilisation rates of its drilling and offshore construction divisions.

• QoQ sector core net profit fell 10% QoQ mainly due to Sapura Energy’s shocking loss from low utilisation rates. Excluding Sapura Energy’s results, the sector’s core net profit would instead have risen by 10% QoQ from improved results of Petronas Gas, UMWOG, MMHE and Dialog.

• Raising 2018-2019 price outlook to US$60-65/barrel. The OPEC production quotas that were initiated in the beginning of last year appears to have suppressed US oil inventories, which have fallen by 21% from March 2017 to 423.5mil barrels, despite US daily oil production reaching above 10mil barrels, and expected to reach 11mil barrels by the end of this year. As such, we have raised our 2018-2019 Brent crude oil projection to US$60/barrel-US$65/barrel from US$55/barrel-US$60/barrel vs. the EIA’s WTI crude oil prices at US$58/barrel for 2018.

• Improved contract awards from 2018 Pan-Malaysian umbrella jobs. Contract awards have declined by 15% YoY to RM7.6bil in 2017, even though in 4Q2017 they rose 20% QoQ to RM1.6bil mainly from the 2018 Pan-Malaysian Transport & Installation/Maintenance, Construction & Modification jobs to Sapura Energy. This was a hefty surge of 14x YoY vs. only RM112mil in 4Q2016. As these Pan Malaysian umbrella scope of works are mainly determined on a call-up basis, we still expect Petronas to maintain a cautious approach to upstream exploration and development expenditures.

• Lifting the sector to OVERWEIGHT from NEUTRAL given the stabilising crude oil prices above US$60/barrel notwithstanding Petronas’ cautious capex strategy. As asset utilisation rates have begun to improve, we expect charter rates to have bottomed out even in the absence of any upward trajectory at this juncture. Hence, attractive valuations have emerged for recently upgraded stocks — MMHE, Sapura Energy and Bumi Armada — which are trading below their intrinsic values. Our top picks are still companies with stable and recurring earnings such as Dialog Group and Yinson. 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. As such, we now have 5 BUY calls on our portfolios vs. HOLDs for MISC and UMWOG. We maintain a SELL for Petronas Gas due to the Energy Commission’s upcoming announcement of the transportation tariff setting mechanism next month, which we expect to be value-eroding due to an expected lower targeted rate of return on asset values.
• Watch out for multiple de-rating risks. We highlight that there are still multiple risks for the sector due to : 1) continuation of US crude inventory expansion; 2) slower-than-expected global economic growth; 3) accelerated adoption of fuel-efficient-cum-electric vehicles that could reduce consumption and lead to “peak oil demand”; 4) non-compliance by OPEC members to their agreed quotas, which will again lead to aggressive measures to regain market shares; and 5) increasing exit from oil and gas stocks by ESG-compliant global funds. Recall the recent decision to exclude oil and gas stocks from Norway-based Norges Bank Investment Management’s US$1tril fund may be an indicator of trends for other global funds in their commitment towards compliance on environment, social and corporate governance (ESG) policies.

Source: AmInvest Research - 2 Mar 2018