• Overall, 4Q19 performance for companies under our coverage was largely below our expectation (PetDag, PChem, LC Titan, Hibiscus and Velesto) except for MMHE which met our expectation.

• We made earnings downgrade to Velesto (higher depreciation charges), PChem (lower ASP), PetDag (lower sales volume) and Hibiscus (lower production rate).

• We remain OVERWEIGHT on overall Oil and Gas sector particularly on upstream segment. We upgraded PChem to BUY as the sharp decline in share price presents attractive entry price for its medium to long term growth potential.

• 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: RM1.15) as the company switches into acquisition mode again to meet its 2021 target.

Mostly below expectation

Oil & gas-related companies’ 4Q19 results were largely below our expectation save for MMHE. As expected, MMHE posted its first profitable quarter since 4Q17 driven by FPSO Ledang conversion works. Meanwhile, Velesto turned to black in FY19, but 4Q19 earnings were impacted by lower utilisation rate due to drydocking of NAGA 3 and NAGA 7. On the other hand, dismal performance from PChem stemmed from lowerthan-expected ASP, whereas LC Titan’s associate income from new US shale plant was smaller than expected. PetDag’s 4Q19 earnings normalised from large inventory loss in 4Q18 but this was not enough to offset rising opex. Hibiscus’ oil production growth rate was slower than our expectation due to execution risk of planned capex project.

Change in earnings forecasts

Consequently, we pared down our expectation by imputing higher depreciation for Velesto to account for drydocking expenses. Amidst weak ASP environment, we further cut our ASP assumption for PChem while LC Titan’s 1H20 will be further impacted by scheduled maintenance activities. We also reduced PetDag’s sales volume assumption on expectation of lower jet fuel demand owing to Covid-19 outbreak. While we remain optimistic with Hibiscus’ rising oil production, we turned more conservative with our assumption. On the flipside, Yinson (FYE Jan) is expected to deliver a stronger 4QFY20 (Nov-Jan) as FPSO Helang new charter begins.

Maintain OVERWEIGHT on the sector

Despite several earnings downgrade, our positive view on the sector is maintained. The slower oil demand growth concern amidst Covid-19 outbreak has consequently sent oil price lower. Nonetheless, we foresee limited impact to offshore projects as the industry has managed to bring down its cost during the previous downcycle. We retain our average Brent forecast for 2020 at US$65/bbl (YTD: US$59/bbl) at this juncture pending the outcome of OPEC meeting on Mar 5-6 with regards to production cuts.

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 global FPSO demand. There is further upside potential as it seeks to finalise FPSO Pecan deal with Aker Energy while long term earnings growth may be sustained via venture into renewables through Ezion. We also like Hibiscus (BUY, TP: RM1.15) which is a pure-play oilfield operator. We think it may be able to leverage on lower oil price to acquire brownfield assets at a bargain in order to meet its 2021 production target.

Source: BIMB Securities Research - 5 Mar 2020