Petronas’ positive activity outlook, improving work visibility, and the recovery in the global oil majors’ capex are expected to be the key catalysts for the Malaysia O&G sector. The ytd improvement in global oil prices has also sparked renewed sentiment in the sector. Against this positive backdrop, we reiterate our Overweight view on the O&G sector. Our top picks are Petronas Chemical (PCHEM), Serba Dinamik and Kelington. Velesto Energy is our alpha trading Buy idea.

Sector Activities Are in a Brighter Spot

Earnings for Malaysia O&G companies are poised to rebound driven by improving work visibility, as indicated by Petronas’ activity outlook report over 2019-21. The number of contracts awarded in 2018 jumped by 41% with aggregate value up by 2%. These are signs of a broad-based sector recovery which is expected to spark more excitement in the sector. Further supporting our view is the fact that the small/mid-cap companies have showed vast improvements in their operating cash flows since the oil-price down cycle, as shown in our heat map (Figs 17 & 18).

Recovery in Brent Price to US$70-75/bbl

US production is near its peak with growth expected to moderate for the rest of 2019, but these additions will be partly offset by the ongoing aggressive production cuts by OPEC+ group. Demand growth is expected to continue to hold up, supported by strong consumption from China and India. All this points towards a more favourable supply-demand dynamic. We forecast 2019 Brent oil prices to trade in the range of US$70-75/bbl.

Seeking Alpha in the O&G Space

PCHEM and Serba Dinamik Are Our Top Big-cap and Mid-cap BUYs. While upside is limited on the former, the stock’s attraction lies in FY20 once RAPID commences operation and premised on our positive projection for global oil prices. While there may be profit-taking for Velesto Energy given the steep run-up in its stock price and ahead of lacklustre 1Q19E results, we remain long-term positive given the jack-up demand outlook in 2019 on the back of increased Petronas drilling activities in Malaysia. We are also upbeat on Kelington with the commencement of its liquid carbon dioxide plant being a catalyst for the stock.

Source: Affin Hwang Research - 27 Mar 2019