• Possible lower-for-longer oil price scenario prompted Petronas to delay marginal field development. Nonetheless, the outlook for mid-to-large sized field development remains constructive as oil stabilizes above USD40/bbl, in our view. We forecast Brent to trade at an average of USD45/bbl in 2021.

• We are optimistic with recovery in offshore projects as we expect Petronas to allocate more capital towards upstream segment following completion of its downstream project.

• We upgrade our sector recommendation on upstream to OVERWEIGHT (from NEUTRAL) as we foresee a recovery in offshore development projects in near future. At current price, we believe the upside potential outweighs the risk.

Resumption in new offshore development projects

Despite pessimism over Petronas’ capex cut, we believe the worst is over for Malaysia’s upstream segment as we think under-investment in prior years will ensure a steady number of projects maturing within next 3 years. In addition, we believe Petronas’ effort in high-grading its development strategy to favour mid-tolarge sized fields will reduce the possibility of further delay in new field development projects. Despite higher dividend payment to government, we think the completion of Petronas’ downstream project (i.e. Pengerang Integrated Complex) which is worth c.RM100bn will lead to higher allocation towards upstream projects.

Riding on recovery theme

Overall, there are 11 projects now under execution and 19 new projects already approved to be sanctioned over the next 3 years. On top of that, there are also 25 projects that are at pre-FID stage currently. We believe this should continue to support revenue visibility for fabricators in the medium term. Meanwhile, Petronas projects that it would require 7-10 jack-up rig (JUR) annually over the next 3 years, which is close to 5-year average (8.5 units), based on our estimate. This is higher than typical downcycle demand level, as higher demand for development well drilling is required currently (after the completion of HUC activity) before first oil/gas to be produced. Furthermore, 8 out of 11 on-going projects are expected to be completed this year which should also support jack-up rig utilisation. As such, we think both fabricators (MMHE) and jack-up rig operator (Velesto) are on track to see recovery in business activities and revenue for FY21 and FY22.

Change in earnings forecast

With expectation of stable demand for JUR, we raised Velesto’s FY21/22F utilisation rate assumption to 70%/67% (from 60%/60%) which brings us to reduce our earlier net loss forecast by 53%/60% respectively.

OVERWEIGHT on Upstream services

We upgrade our sector recommendation on upstream to OVERWEIGHT from NEUTRAL. We upgrade Velesto to BUY (from HOLD) with higher TP of RM0.265 on steady demand for jack-up rig in next 3 years. We also maintain our BUY call on MMHE with higher TP to RM0.77 given the recovery path in offshore projects.

Source: BIMB Securities Research - 7 Jan 2021