We are still bullish on the sector and are maintaining our OVERWEIGHT call as the outcome of GE13 was encouraging for Petronas’ aggressive domestic capex spending. Despite so, a more selective stock-picking strategy is recommended in 3Q13 as: 1) there are many tenders upcoming that could see actual awards only emerging by year-end; and 2) the ongoing monetary policy reviews by the various global central banks could also lead to heightened market volatilities, especially for the high-beta sectors like oil and gas. Investors should look to accumulate on weakness stocks in certain key subsectors mentioned below, as they are likely to remain in the limelight. Our Top Pick continues to be SapuraKencana Petroleum Bhd (“SKPETRO”, OP; TP: RM4.72) due to its breadth of service offerings that makes it a domestic mammoth and a burgeoning global player in the oil and gas space. We also like Dayang Enterprise (“DAYANG”, OP, TP: RM6.06) for its sizeable hook-up and commissioning order backlog which will provide earnings visibility for at least the next 4 years.
Ongoing market monetary policy reviews suggest likely higher market volatility levels ahead, so be selective. Despite so, we believe that the domestic oil and gas sector will still be vibrant, especially in certain key sub-sectors where the national oil and gas production objectives prevails and Petronas continues its aggressive capex spending. On the global front, countries like Brazil, Africa and Mexico (where most of our oil and gas companies are also servicing) have also been aggressive in the contract roll-out. For 2QFY13, contract wins by our local boys amounted to c.RM18b; an encouraging sum versus the RM10.8b job win rate in 1QFY13 and RM2.2b in 2QFY12.
More contracts to come. The key domestic subsectors we foresee to be of interest are the: 1) drilling segment on the back of the expiry of several Malaysian and Southeast Asian contracts by 2013-2015 and a potential re-rating for stocks involved in the segment during the upcoming UMW-listing; 2) Inspection, Repair, Maintenance (IRM) segment, where c.RM1.8b worth of works are purportedly still up for grabs; 3) Pan-Malaysian Transport and Installation (T&I) segment, which should be up for tenders soon, and 4) Engineering and fabrication projects, where we believe at least two (i.e. North Malay Basin and Sepat) could emerge soon. More Risk-Service-Contracts (RSC) awards are also expected, judging from the new recent setup, Vertigo, which implies that Petronas is serious on accelerating the marginal field roll-outs.
Further industry M&As expected. Post the success of the SKPETRO merger, we suspect that there could be further mergers and acquisitions amongst oil and gas companies (especially within the small-tomid market-cap space) as it is increasingly evident that oil and gas majors prefer to award contracts to players with either integrated services (most jobs now run on an EPCIC (Engineering, Procurement, Construction, Installation and Commissioning) basis) or with significant scale. These scenarios point to: 1) fiercer competition within the domestic players as services offered start to overlap; 2) more tie-ups with foreign companies; and 3) aggressive capex spending for new assets. While this could be a detriment to certain domestic players, we think that the consolidations and asset acquisitions are warranted as it will signify that the industry is on a growth mode (beyond being just small-scale vendors and/or agents of foreign technology). Also, we believe that the sheer amount of contracts mean that there is plenty to go around.
Potential RSC players: Transformers in disguise? According to Upstream, RSCs will be an ongoing feature of the Malaysian oil and gas scene with 10 fields up for grabs in this round of awards. The favoured names are SKPETRO, Bumi Armada (“ARMADA”, NOT RATED) and DIALOG (OP; TP: RM3.28) for their stable balance sheets and tested track records. However, smaller names like Scomi, Daya Materials, TH Heavy and Uzma Bhd (“UZMA”, OP, TP: RM3.64) are also vying for a slice of the pie. Judging from the PER re-rating of say, Petra Energy (“PETRA”, Not Rated) and UZMA, we believe that future RSC players will enjoy a similar run-up as investors reward them for taking risks to scale up the oil and gas value chain.
Reiterate OVERWEIGHT. Our TOP PICK is SKPETRO (OP; TP: RM4.72). The expectation of M&A activities and contract flows should lend strength to valuations and thus, we maintain our Outperform call on: DIALOG (OP; TP: RM3.28); ALAM (OP; TP: RM1.91); DAYANG (OP; TP:RM6.06); COASTAL (OP; TP: RM2.90); PERISAI (OP; TP: RM1.76); YINSON (OP; TP: RM5.58); UZMA (OP; TP: RM3.64) PERDANA (OP; TP: RM2.04); GASMSIA (OP; TP: RM3.39); PANTECH (OP; TP: RM1.18); PCHEM (OP; TP: RM6.97); SEB (OP; TP: RM0.78). We are Neutral to UP on prospects of PETGAS (MP; TP: RM20.31), MHB (UP; TP: RM3.39); and WASEONG (UP; TP: RM1.73).
Source: Kenanga
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