We reiterate our OVERWEIGHT call as the longer-term prospects remain positive on the back of continued Petronas spending. To summarise, 1Q14 was relatively quiet mainly marked by: (i) minimal contract flows; (ii) mixed full-year results season, and (iii) the Offshore Technology Conference (OTC). One thing missing, however; was the final investment decision (FID) results for the RAPID project which we still believe will be announced within 2014. For 2Q14; we still favour the OSV and jack-up rig segment; whilst RSC and EOR awards will be a recurring theme throughout the year. Despite the positive long-term prospects; given near-term uncertainties with regards to the timing of project awards and the significant run-up in valuations for certain stocks, we advocate a more selective investment strategy in the coming quarter; with preferences for laggard plays that have strong order-book to back up earnings visibility. For the large-cap space we like: (i) Sapurakencana Petroleum Bhd (SKPETRO; OP; TP: RM5.57) as it is Malaysia’s most integrated upstream play and (ii) Dialog Group Bhd (DIALOG; OP; TP: RM3.92) given its position as the main beneficiary for the RAPID project. In the smaller-cap space, our preference is Coastal Contracts Bhd (COASTAL; OP; TP:RM5.94) and Perdana Petroleum Bhd (PERDANA; OP; TP:RM2.47).

Relatively quiet 1Q14. Contract flows were unexciting at RM3.7b with the bulk mainly going to Bumi Armada (NOT RATED) (RM1.8b mainly for the extension of a FPSO contract) and to Coastal Contracts (RM1.4b mainly for a jack-up gas compression unit contract). In terms of the 4QCY13 results season, it was a mixed bag with a fair share of hits and misses. Overall, it was a pretty uninspiring 1Q; with the exception of OTC that was held from 25th-28th March. The event was a big deal for Malaysia given that this is the first time in its 44-year history, it was being held overseas.

Malaysia reinforced goals and strategies in OTC. In panel sessions for the OTC, Petronas highlighted its goals of achieving: (i) 3-3.5% production growth per annum; (ii) reserve replacement ratio of >1.1; and (iii) ROACE of 15-20%; via (a) sweating its assets (enhanced oil recovery); (b) developing marginal/idle fields and (c) aggressive new field exploration. The targets and strategies were unsurprising (as they were in-line with the main thrusts of the Economic Transformation Programme - ETP); however, as they were re-iterated, this implied Petronas’ commitment to its longer-term plans of sustaining domestic production and the eventual roll-out of contracts.

News on EOR and RSCs projects finally emerge. Post the OTC, news reports have stated that the 4th and 5^th RSCs have been awarded to: (i) Uzma Bhd (Tanjung Baram field); and (ii) Vestigo (Tembikai field). Such awards were largely expected, but nevertheless, we are relieved as the RSC awards have been delayed, in our view. We gather that there are two more RSCs scheduled this year for Scomi Energy (Ophir) and SKPETRO (Bubu); however, there has been no feedback in terms of timelines. In the OTC, Petronas mentioned that it targets the final investment decision (FID) of the Angsi chemical enhanced oil recovery project (CEOR) and is embarking on front-end engineering and design (FEED) studies for Dulang, Bokor and the Baram Delta.

Still watching out for OSV and rig awards in 2Q14. We still believe that the OSV and drilling sector will dominate headlines as there were very few OSV and zero rigs awards in 1Q14. For the OSV segment, an added catalyst would be the Icon Offshore IPO that is slated for kick-off soon (the exposure draft is already available and market talk is for a listing by Jun/July-14). For the jack-up rig segment, there were three domestic drilling contracts that expired between the period of June 2013 and February 2014 with an upcoming two more that will be expiring by 2Q14. All of which have yet to be filled. Regionally, c.11 drilling rig contracts are estimated to expire by 2Q14. Such contract expirations will spur demand for the local rigs (i.e. UMW O&G and Perisai Petroleum).

Focus on laggard-plays. Post the General Elections in 2013; some stocks soared as much as 7-9x in trading PERs. Whilst these stocks are still gems in their own right; we believe there are more risks versus benefits in terms of forward share price gains. Hence, we advocate focus on laggard-plays, with strong existing order-book to back up earnings visibility. In the large-cap space, we like (i) SKPETRO given the relative discount to its peers like UMW O&G which trades at CY14-15 PER of 30.2-18.8x and (ii) DIALOG as it is the main beneficiary for any RAPID play. We are also turning neutral on MMHE (MP; TP: RM3.60), (from Underperform previously); given that its share price has retraced to healthier levels while fabrication news-flows could improve come mid-CY14 on the back of the EOR projects. In the smaller-cap space; we like COASTAL as landing a jack-up rig could be a near-term catalysts for the stock and PERDANA as most of its vessels are on long-term contracts; and the sector could be poised for a re-rating with the coming Icon-Offshore’s listing. Both stocks trade at relatively attractive CY14-15 PERs of 13.2-11.6x and 13.4-11.6x (versus estimated post fund-raising PER for stocks like UZMA (CY14: 19.6x; CY15: 15.2x) and YINSON (CY14: 21.9x; CY15: 19.6x).

Reiterate OVERWEIGHT call. We believe market interest is still keen for the sector; hence we reiterate our bullish call. Our other Outperform calls are: ALAM (OP; TP: RM2.10), BARAKAH (OP; TP: RM1.98), COASTAL (OP; TP: RM5.94); DAYANG (OP; TP: RM4.82); PERISAI (OP; TP: RM2.53); and PANTECH (OP; TP: RM1.07), UZMA (OP; TP: RM7.30). We are Neutral and Underperform for YINSON (OP; TP: RM9.50). PCHEM (MP; TP: RM6.97), MHB (MP; TP: RM3.60), GASMSIA (UP; TP: RM3.41), PETGAS (UP; TP: RM20.77), and WASEONG (UP; TP: RM2.00).

Source: Kenanga