• Overall, 2Q20 performance for companies under our coverage were largely disappointing except PetDag’s weak earnings which is inline with our forecast.
   
• We made earnings downgrade to upstream services (Velesto and MMHE) on costs impact due restricted movement and further delay in new offshore projects. We also cut earnings for petrochemical producers (Petronas Chemicals and Lotte Chemicals) on lower average selling price than expected in 2Q20.

• We maintain our NEUTRAL view on Oil and Gas sector as we see limited upside to current oil price. 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.

Largely below expectation

2Q20 results were full of disappointments with the exception of PetDag’s weak earnings which is in accordance to our expectation. PetDag’s sales volume plunged 39% yoy due to weak demand amidst Covid-19 pandemic. For upstream services companies, both MMHE and Velesto were impacted by rising costs due to supply disruption and restricted movement order while Hibiscus fell into losses due to low oil price and sales volume. Likewise, petrochemical producers such as Petronas Chemical and Lotte Chemical earnings were hit by weak average selling price (ASP) in tandem with oil price.

Further earnings downgrade

We made further earnings downgrade to upstream services companies as we expect further delay in offshore projects. This will bring down Velesto’s rig utilisation rate as well as slow down MMHE’s orderbook replenishment activities. We also revised lower ASP for petrochemical producers following weaker than expected ASP in 2Q20.

Maintain NEUTRAL on the sector

At this juncture, we maintain our NEUTRAL view on the Oil and Gas sector with average Brent forecast of USD41/bbl in 2020 (YTD: USD42.6/bbl). We concur with consensus’ view that bearish sentiment will continue to prevail towards the sector amidst lower-for-longer oil price narrative. However, we think most companies under our coverage will be able to weather current downcycle leveraging on their strong balance sheet. Valuation wise, we think beaten-down share price has largely reflected next couple of quarters’ weak earnings which may be attractive for bargain-hunting.

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: RM2.00) is the only potential beneficiary from cheaper feedstock costs, but this benefit may be partially offset by weaker ASP.

Source: BIMB Securities Research - 9 Sept 2020