• Overall, 1Q20 performance for companies under our coverage was largely weaker in accordance to our expectation (Hibiscus, PetDag, PChem and LC Titan) due to immediate impact of plunging oil price while MMHE and Velesto were shielded due to lagging impact on service companies.
• We made earnings downgrade to Velesto and MMHE on expectation that lower oil price may lead to capex cut and delay in new contract awards. Recent news report confirmed our view as Petronas stated that it may cut its opex and capex by 12% and 21% respectively in 2020.

• We upgrade the Oil and Gas sector to NEUTRAL (from UNDERWEIGHT) on signs of oil demand recovery. Yinson (BUY, TP: RM7.70) remains our top pick owing to its long-term earnings visibility as well as the potential earnings growth it offers from Petrobras’ FPSO demand.

Mostly weaker as expected

1Q20 results were largely weaker in accordance to our expectation except for MMHE and Velesto. As expected, both Hibiscus and PetDag saw the immediate impact of plunging oil price on their earnings; the former suffered from lower realised oil price while the latter’s loss was compounded by inventory losses as well as declining sales volume due to lockdown measures. Meanwhile, petrochemical producers such as Lotte Titan and PChem were also hit by lower product spread and inventory losses. The offshore service companies such as Velesto and MMHE, however, remained profitable as both remain packed with existing work orders.

Earnings downgrade for offshore service companies

Despite faring rather well in 1Q20, the bleak outlook in the sector has prompted us to downgrade our earnings forecast for the offshore service companies which may be affected by capex cut by oil companies. We revised lower our utilisation rate and DCR assumptions for Velesto in expectation of lower drilling activities in near term. We also cut MMHE’s earnings forecast due to significant execution risk to existing work orders due to disruption in supply chain as well as potential delay in new contract awards. Our view was confirmed as it was reported that Petronas may cut its opex and capex by 12% and 21% respectively against its budgeted spending in 2020.

Upgrade the sector to NEUTRAL

We upgrade our recommendation on the Oil and Gas sector to NEUTRAL (from UNDERWEIGHT) on improving demand outlook as more countries are easing the lockdown measures and reopen the economies. We keep our average Brent forecast for 2020 at US$30/bbl (YTD: US$42/bbl), for now. We think US shale players may restart its drilling should oil price recovers too fast too soon, hence limiting the upside for oil price from current level. We reckon that oil companies may only proceed with development projects when oil price sustains above USD40/bbl.

Sector top pick; Yinson (TP: RM7.70)

Yinson (BUY, TP: RM7.70) remains our top pick owing to its long-term earnings visibility as well as the potential earnings growth it offers from Petrobras’ FPSO demand. In low crude oil price environment, we think Lotte Chemical Titan (HOLD, TP: RM2.20) is the only potential beneficiary from cheaper feedstock costs, but it may be partially offset by weaker ASP.

Source: BIMB Securities Research - 4 Jun 2020