After the past few years of sailing on rough seas, we believe the backdrop for the Malaysian O&G sector has turned supportive. We see a few positive inflection points that have already started to materialize. Global oil majors’ capex are guided to be higher in 2018. Contract flows have also been picking up, which will translate into corporate earnings recovery. On the macro front, the strong adherence to global production cut, and robust demand should continue to support oil prices. Reiterate our Overweight call.

Accelerated Earnings Growth

Results from the recently concluded 4Q17 earnings season were commendable. Most O&G companies under our coverage reported earnings growth yoy, led by our top pick Bumi Armada and UMWOG. Our sector core earnings growth, while not outstanding, came in at a modest +3.6% yoy in 2017, and is expected to post another +5.1% yoy growth in 2018. For the overall industry, consensus is expecting a sector earnings growth of 13.4% and 8.9% in 2018E and 2019E, respectively.

Positive Contract Flow and Capex

Aggregate sector contract value in 2017 jumped 35% yoy to RM16.8bn vs. RM12.5bn in 2016. 3M18 contracts value grew 2% yoy as compared to 3M17 (after stripping out recently awarded Pegaga). Global oil majors’ have revised capex higher by an average 5% yoy in 2018, after cutting back by nearly half since 2014. Based on higher Petronas and oil majors’ capex, we believe contract flows will accelerate in 2018. Industry players have seen higher surveys and tender activities along some of the services value chain.

More Bullish on Earlier Brent Assumptions

We have revised our earlier $58/bbl Brent crude oil price assumption higher and now expect it to trade in the range of US$63-68/bbl (average of US$65/bbl) in 2018E. Our long-term price assumption is at US$75/bbl.

OVERWEIGHT: Time to Relook at O&G

All in, we reiterate our OVERWEIGHT sector call as we see more value emerging from the sector, driven by positive sentiment (stabilisation in global oil prices, more tenders/contracts roll out and less earnings disappointment). For sector exposure, we reiterate Petronas Chemical as our top pick among the Big-caps, Bumi Armada and Serba Dinamik among the Small-Mid cap stocks. We introduce UMWOG as an Alpha trading idea. In this report, we also upgrade Petra Energy to BUY and downgrade Gas Malaysia to a HOLD after the share price run up.

Source: Affin Hwang Research - 27 Mar 2018