• Overall, 2Q19 performance for companies under our coverage were largely below expectation (PetDag, PChem, LC Titan, MMHE and Hibiscus) while Velesto is on track to return to the black in FY19.

• During the period, we cut earnings forecast for PetDag (higher depreciation cost) and PChem (imputing lower ASP). We see further earnings recovery for upstream players such as MMHE and Velesto on higher offshore activities due to underinvestment in prior years.

• Yinson (BUY, TP: RM7.70) remains our top pick as it rides on rising FPSO demand in Brazil while competition is limited. We also favour Hibiscus (BUY, TP: RM1.50) as we expect higher production volume from recent capex spent while long term outlook would be supported by the Marigold greenfield development.

• Maintain NEUTRAL for overall Oil and Gas sector but OVERWEIGHT on upstream players and NEUTRAL on downstream.

Underwhelming performance bar Velesto

2Q19 results were largely below expectations. Petrochemical players (PChem and LC Titan) suffered from narrowing product spread due to weak demand arising from escalated US-China trade tension while PetDag was hit by higher depreciation and inventory lag loss as oil prices weakened. For Hibiscus, earnings were affected by higher-than-expected effective tax rate while delays in contract wins weighed on MMHE’s earnings. Only Velesto fared better as Petronas ramped up drilling activities.

2H19 outlook: some respite ahead

Consequent to the poor performances, we pared down expectations for PChem, on softer ASP outlook, and PetDag, for higher depreciation charges. Despite downside risk to our view, we maintain FY19F earnings for LC Titan and MMHE; the former should benefit from commercial operation of US shale gas plant in Aug 2019 while the latter’s project tenders are expected to be announced in 2H19. Velesto should see stronger 2H19 as upstream activities continue to ramp up; utilisation of Velesto’s jack up rig should hit 100% by 4Q19. Meanwhile, Hibiscus should higher sales volume after spending on production enhancement program. Yinson (FYE Jan) is expected to deliver a stronger 4QFY20 (Nov-Jan) as FPSO Helang new charter begins.

Uptick in offshore activities; OVERWEIGHT on Upstream

Our positive view on upstream players is premised on recovery in offshore activities after underinvestment in prior years. We maintain our average Brent forecast for 2019 at US$65-70/bbl (YTD: US$64.9/bbl) which should continue to spur offshore investment. We take a NEUTRAL view on downstream players as 1H19 share price weakness has largely priced in earnings risks, in our views. We also think the companies’ strong net cash position may provide stability until market recovers.

Sector top pick; Yinson (TP: RM7.70) and Hibiscus (TP: RM1.50)

Yinson (BUY, TP: RM7.70) remains our top pick as it rides on rising FPSO demand in Brazil against the backdrop of limited competition. We expect contract award for FPSO Marlim and FPSO Parque Das Baleias to be finalised in 2H19. We also like Hibiscus (BUY, TP: RM1.50) as a pure-play oil field operator; recent capex spending should boost oil production while long term outlook would be supported by the Marigold greenfield development.

Source: BIMB Securities Research - 6 Sept 2019