Petra Perdana is expected to release its results today and Alam tomorrow. The financial year ends on Dec 31 for both companies.

At Petra Perdana, management spent a large part of 1H fighting a boardroom tussle and lawsuits. The company has been hit by a low vessel utilisation rate of less than 60%.

This unfavourable setting may have contributed to another loss-making quarter after 1QFY2010's core net loss of RM4.7 million. It was also tough going for 29.6%-owned Petra Energy Bhd (not rated), which announced a 2Q2010 net loss of RM2.3 million on Aug 19, citing vessel refurbishment and lower margins from brownfield services.

While it is comforting that the squabbling between the former and current managements of Petra Perdana is finally at an end, the operating environment remains challenging. The loss of income from the work barge and two work boats which were sold by the former management to Petra Energy Bhd last year is now being felt, given the sluggish demand for AHTS vessels.

Marine support players are hopeful that contracts will be awarded from September onwards but execution may take some time.

Therefore, FY2010 is shaping up to be a washout for Petra Perdana. Against this backdrop, we view the company's recent move to cancel the purchase of a vessel as sensible.

Alam, meanwhile, was mired in legal troubles as well during 2QFY2010. MLC Barging Pte Ltd claimed ownership of two of Alam's vessels, Setia Ulung and Setia Aman, which were already fully paid for by Alam.

A full-blown courtroom battle was averted when Alam announced on July 22 that MLC Barging had discontinued its case, leading to the release of the two vessels to Alam.

In terms of operations, Alam faced a slowdown as well in 2Q2010 with three vessels out for maintenance and two (8,920HP Setia Jaguh and 5,150HP Setia Sakti) spending a large part of the quarter without contracts. Furthermore, the underwater services business continued to underperform.

We expect an earnings reduction as our forecasts are too bullish and overestimate the pace of contract awards.

Pending the release of the 2Q2010 results, we maintain our earnings forecasts, target prices and recommendations for Petra Perdana and Alam. However, we caution investors that we may trim our EPS forecasts and target prices for both stocks, potentially leading to a downgrade of our recommendation for Petra Perdana, though not for Alam.

Although the anticipated weak 2Q2010 results for Petra Perdana and Alam are a letdown, we remain "overweight" on the oil and gas sector. We understand that 4Q2010 is likely to see the award of contracts, including a RM1.5 billion offshore maintenance contract, which has attracted the interest of marine support players.

With the exceptions of Petra Perdana, Alam and Wah Seong Corp Bhd, O&G stocks in our coverage are not expected to disappoint with their 2QCY2010 results. Dialog Group Bhd ("underperform") sprang no negative surprises when it announced its quarterly results last week while Petronas Dagangan Bhd ("underperform") is likely to do the same today.

Sector favourites SapuraCrest Petroleum Bhd and Kencana Petroleum Bhd ("outperform") will release their results next month. Kencana is poised to post a record annual net profit while SapuraCrest is set to hit an all-time high net profit for a six-month period. SapuraCrest remains our top O&G pick. ? CIMB Research, Aug 24

This article appeared in The Edge Financial Daily, August 25 2010.