With heightened uncertainty over global demand and a good run-up in O&G stock prices in 1H19, we are downgrading the sector to Neutral (from Overweight) as the risk-reward profile is skewed to the downside. While better corporate earnings delivery and contract flows are among the key items to look out for in 2H19, these are likely already priced in. We believe the upcoming OPEC meeting will see an extended production cut, although at a smaller quantum in view of the rebalanced oil market.

Fundamentals Intact for Oil Prices to Trend Higher

Concerns over an escalation of a trade war saw global oil prices took a beating of late, with Brent crude oil prices now trading at the lower end of US$60/bbl. While there is market expectation of a compromise between the US and China, the after effect has already been felt from the earlier rounds of tariffs. With economic demand at risk more than ever, we downgrade our 2019E Brent crude oil price forecast to US$65–70/bbl (from US$70–75) and 2020E forecast to US$65–70/bbl (from US$70).

Work Activities and Contract Flow Pipeline Look Positive

1Q19 corporate earnings were generally viewed as positive compared to previous quarter with PCHEM the only casualty from the prolonged trade war affected by the lower product ASPs. Sentiment on the sector was dragged down following the disappointing, but not unexpected weak results from offshore maintenance players due to the monsoon season. Activity level has seen a pick up from Apr-19, particularly from the maintenance and decommissioning space, also benefiting the offshore support vessel (OSV) players. We expect a strong surge in contract flow as we await the award of hook up commissioning packages (in the range of RM4bn) from Petronas, and also quicker capex spending ramp up as Petronas’ 1Q19 actual spending was seen to be on the low side vs its RM50bn full year target.

Our Preferred Picks

As for stocks, we continue to like Petronas Chemical as our big-cap pick on additional RAPID capacity likely contributing to earnings in FY20E and a better product price outlook. Serba Dinamik and Velesto Energy are backed by strong earnings growth prospects and a visible earnings turnaround for the latter, which makes it a good trading proposition. We also like Kelington for the contribution of its new liquid carbon dioxide plant.

Source: Affin Hwang Research - 18 Jun 2019