Despite a booming 2013, we maintain our OVERWEIGHT call as we believe the sector will continue to be on overdrive in 2014. In our view, it is just a matter of time before more contracts and projects, which were delayed, are finally awarded to the players. In 1Q14, we expect award flows for OSV and jack-up rig players. All eyes will also be on the final investment decision (FID) results for the RAPID project which will spur a re-emergence in interest for the downstream oil and gas players. Marginal field and chemical enhanced recovery projects will also continue to be a mainstay (given Petronas’ aim to increase domestic production), but timeline uncertainties will continue to be a risk. We believe that larger cap stocks will continue to dominate during selections such as: (i) Sapurakencana Petroleum (which coincidentally is our Top Pick for its sole position as Malaysia’s integrated service provider), (ii) UMW O&G, (iii) Bumi Armada, and (iv) Dialog Group. However, investors may also look at smaller-cap ideas for re-rating prospects. In this space, we like Coastal Contract, Alam Maritim and Perdana Petroleum.
2013 - The large oil strike. The overall sector did spectacularly well in 2013 with stocks under our coverage gaining an average of 75% on YTD basis. The significant share price gains are no surprise as around RM30b of domestic contracts (inclusive of international wins, the total rise to RM43.3b) were dished out in 2013, which is a far cry from the c.RM10b contract wins in 2012. Despite significant share price appreciations, we expect further gains as we believe there are still ample project awards in 2014 to act as catalysts.
No slowdown in contracts flow comes 2014. Based on our channel checks, the market is still short of offshore supply vessels (OSVs, i.e., anchor-handling-tug-supply (AHTS), platform supply (PSVs), and (iii) accommodation (barge and boat) vessels and jack-up rigs. Meanwhile, barely any fabrication contracts were awarded in 2013 while risk-service-contracts (RSC)/ Enhanced Oil Recovery projects are seriously lagging behind. All this suggests an abundance of contracts that are yet to be awarded. (Please refer to table titled “Outlook for key upstream oil and gas sub-sectors and potential domestic beneficiaries).
Focus on drilling and OSV stocks in 1Q14, especially the “small-cap” ones. For 1Q14, we believe that the OSV and drilling sector will dominate headlines as: (i) the OSV contracts that were tendered for since end-3Q13 have yet to be awarded and (ii) there are several jack-up rigs entering the market in early-to-mid 2014 that will be looking for contracts before the delivery dates. Whilst the large-cap names like UMW O&G (NOT RATED) in the drilling segment and Bumi Armada (NOT RATED) for the OSV space will remain favourites; we believe that the relative trading PER discounts will spearhead a re-rating for smaller-cap names like peers such as Coastal Contract (COASTAL); Alam Maritim (ALAM) and Perdana Petroleum (PERDANA). For the OSV segment, further catalysts could come from the Icon-Offshore’s IPO (should it emerge this year) assuming it is listed above the CY14 PERs of stocks like ALAM and PERDANA (which stand at 11.3x and 11.9x respectively). In anticipation of heightened interest for the small stocks mentioned above, we are raising our target PERs and consequently their target prices for these stocks. Post our changes, ALAM, PERDANA and COASTAL remain OUTPERFORM at target prices of RM2.07, RM1.82 and RM4.51, respectively.
Laggard plays may surprise. Whilst real awards might come later, we believe that laggard stocks like WASEONG and MHB could see some trading interest should (i) improved market for the respective sectors (fabrication and pipe-coating) and (ii) 4Q13 results come out above our and market expectations.
A revival in the downstream segment? The Final Investment Decision for the Refinery and Petrochemical Integrated Development (RAPID) project is expected by 1Q14. Given its significance to the Malaysian economy, we believe that all efforts will be taken to ensure that the project is good-to-go. Assuming a positive decision, we believe the downstream related stocks (i.e. onshore fabricators, tank terminal operators and process equipment players) will enjoy renewed investors’ interest. Most notably is DIALOG which has a first mover status in the Pengerang area. In our view, DIALOG’s recent strong share price appreciation is due to the stock’s inclusion in the MSCI Index and greater optimism on the RAPID project. In anticipation of a more positive outlook for Pengerang Phase 2A, we have upgraded our TP to RM3.90 on the inclusion of 720k cubic meter (cbm) LNG capacity.
Reiterate OVERWEIGHT call. Our TOP PICK is SKPETRO (OP; TP: RM5.81) as it is the only integrated Malaysian O&G stock. We also maintain our Outperform calls for: ALAM (OP; TP: RM2.07), BARAKAH (OP; TP: RM1.98), COASTAL (OP; TP: RM4.51), DAYANG (OP; TP: RM6.15), DIALOG (OP; TP: RM3.90), PANTECH (OP; TP: RM1.28), PERDANA (OP; TP: RM1.82), SEB (OP; TP: RM0.78), UZMA (OP; TP: RM5.28), and YINSON (OP; TP: RM7.32). We are Neutral and Underperform for PCHEM (MP; TP: RM6.97), PERISAI (MP; TP: RM1.63), GASMSIA (UP; TP: RM3.41), MHB (UP; TP: RM3.39), PETGAS (UP; TP: RM20.77), and WASEONG (UP; TP: RM1.57).
Source: Kenanga
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