Taking a Breather in 3Q Before Charging Ahead

We saw domestic O&G contract flows and global oil prices take a breather in 3Q. 2Q17 sector earnings were better yoy mainly due to downstream players. We remain confident that contract flows in 2017 will surpass 2016 levels. We tone down our expectations and now look for Brent prices to be in a range of USD50-55/bbl in 2017 (from USD55/bbl) and USD55-60/bbl in 2018. Our view on long-term oil prices is unchanged at USD60-65/bbl. We maintain our NEUTRAL sector rating and our top picks are PCHEM, Bumi Armada and Serba Dinamik.

Fewer Earnings Misses as Compared to 1Q17

Core net profit for O&G companies under coverage posted a 27.5% yoy growth in the recently concluded reporting season, mainly supported by Petronas Chemical (PCHEM), Bumi Armada (BAB) and Dialog. PCHEM benefited from a higher product ASP and volume as well as stronger USD. Maiden earnings contribution from FPSO Olombendo, FSU Malta and oneoff income from ONGC and LukOil helped lift BAB’s earnings. Dialog’s earnings growth was mainly supported by the ongoing PDT Phase 2 construction activities. Of the 12 stocks under coverage, 2 exceeded our expectations, 7 were in line and 2 fell short of our expectations. Sapura Energy plans to release its 2Q18 (FYE Jan) results later this month.

Drought in 3Q Contract Flows to Pick-up in 4Q

So far in 3Q17, contract values are down 87% qoq to RM1bn. Apart from that, the number of contracts awarded came to just 6, vs. 17 in 2Q17. We expect contract flows to pick up for the rest of 2017 following the award of Petronas’ modification, construction and maintenance (MCM) contract.

Maintain Sector NEUTRAL; Top Picks: PCHEM, BAB, and SDH

After an internal restructuring, MISC has been classified under our O&G sector. For sector exposure, our top large-cap pick is Petronas Chemical (PCHEM MK, RM7.35), which we upgraded to BUY after its 2Q17 results. In the small/mid cap space, we like Bumi Armada (BAB MK, RM0.74, BUY) and Serba Dinamik (SDH MK, RM2.21, BUY). In this report, we have also lifted our earnings and TP on Dialog (DLG MK, RM2.00), while maintaining our HOLD call. Given our recent downgrade on a change in its fundamentals, Petra Energy (PENB MK, RM0.98, HOLD) falls out of our top small-cap picks. We maintain our NEUTRAL call on the sector.

Source: Affin Hwang Research - 19 Sept 2017