O&G stocks generally outperformed the broader market in 2019, with top sector gainers mostly beneficiaries of Petronas Activity Outlook, particularly the small-mid-cap names. We believe 2020 will be similar with the focus on jack-up rigs, offshore support vessels (OSV), offshore maintenance and fabrication players. In our view, 2020 activities appear positive and could possibly match that of last year, continuing to make the sector attractive for investors. To play this theme, we highlight Dialog, Serba Dinamik, Velesto Energy and Bumi Armada.

Contract activities and pipeline awards remain positive

Though we saw a 13% drop in overall contract value in the sector for 2019, the number of contracts awarded increased by 37% yoy. More positively, work activity according to the recently released Petronas Activity Outlook looks sustainable moving into the new year.

Expect global oil price to be muted in 2020

The recent air strike killing a top Iranian official has sparked another round of geopolitical tensions, resulting in the Brent oil price soaring to a high of US$70/bbl. Notwithstanding this, we expect Brent oil prices to remain muted in 2020 as the oil market is still largely oversupplied. Global demand is projected to improve from 2H20, with tighter supply only from 4Q20 onwards. We forecast 2020 Brent oil prices to trade in the range of US$60–65/bbl. However, we acknowledge that near-term global oil prices will likely ride on any developments between US and China negotiations and more so, any escalation of tensions between the US and Iran.

Maintain Neutral on sector; favour small caps for exposure

Though we have a Neutral call on the sector largely weighed down by our ratings on the large caps, we believe investors should maintain focus on the beneficiaries of the Petronas Activity Outlook. We recommend a Buy on Dialog for its long-term recurring income play, Serba Dinamik on promising order-book growth (both beneficiaries of downstream plant maintenance and turnarounds), Velesto Energy on the improving jack-up utilisation and daily charter rates (DCR), and Bumi Armada to play a recovery in OSV space. We remain cautious on large caps and retain a Sell rating on Petronas Chemical given the challenging product prices and possibly the risk of the company incurring losses for its Pengerang RAPID plant’s maiden year of operations.

Source: Affin Hwang Research - 10 Jan 2020