Last week, we attended an exclusive talk featuring experts from Westwood Global Energy (WGE), led by its director, Mr. Thom Payne. Overall, we felt that the talk largely reaffirmed our NEUTRAL view towards the sector, with WGE seeing it unlikely for oil prices to continue rallying to touch USD100/barrel, having set a long-term oil price outlook of USD80-85/barrel. And while oil majors are recently sitting on increased free cash flows amid improved oil prices coupled with extensive cost rationalisation efforts over past couple years, WGE still finds that capex levels have yet to see a meaningful uptick as most oil majors still adopt a “wait-and-see” approach in anticipation of clearer signs of oil price stabilisation. Likewise, WGE also finds little catalyst within the offshore services segment, with rig utilisation and OSV charter rates remaining stale. However, the topside maintenance space could be a bright spot on the back of higher work orders given maintenance delays over the past couple of years. All-in, while we can be slightly more positively biased given the recent rally in oil prices, we still feel the need to be selective with stock picks within the sector. Among all, we picked SERBADK as our top-pick given its commendable earnings delivery and superior ROE. Elsewhere, we named DAYANG as a beneficiary within the topside maintenance space, while UZMA could also benefit from the increase in Brownfield activities.

Talk titled “$80 oil – where do we go from here?” Last week, we attended an exclusive talk featuring experts from Westwood Global Energy (WGE), led by its director, Mr. Thomas Payne, to share their views and outlook on the global oil and gas market. The event was well attended by close to 50 participants from the investment community crowd. Overall, we returned with a slightly cautious outlook towards oil prices. While crude oil prices have recently just breached the USD80/barrel-mark, WGE iterated its long-term oil price outlook of USD80-85, while also stating their views of the unlikelihood for oil prices to touch the USD100 level in the coming future. This stems from supply-side factors, such as: (i) gradual pick-up in OPEC oil production to fill up Iran’s lost exports volumes following U.S. sanctions, (ii) ever-growing supply of shale oil, and (iii) prolonged pressures in Venezuela’s oil exports. Meanwhile on the demand side, global demand is expected to continue its stable growth trajectory, driven primarily by China and India. Interestingly enough, Payne highlighted India’s potential to possibly overtaking China in oil consumption per capita in the coming years, underpinned by its rapidly growing GDP. All-in, we reaffirm our average Brent price projection of USD75 for 2018-2019.

Significantly improved cash flow, but capex growth remains stale. During the talk, Payne highlighted the huge recovery of free cash flows seen among E&P oil majors, especially from the negative cash flows during 2015-2016. In fact, WGE estimates 2018 free cash flows level to even surpass 2014 pre-oil price plunge. Improved oil prices aside, this was also largely attributed to intensive cost rationalisation efforts over the past 1-2 years, with Southeast Asia’s overall basket of E&P players showing a 38% drop in opex per barrel of oil equivalent (boe) since 2014, while Petronas is also showing a similar drop of 45%. However, this has yet to translate to any meaningful upticks in capex spending. Overall, we understand that the narrative among oil majors is still leaning towards a “wait-and-see” approach, in anticipation of clearer signs of oil price stabilisation. Nonetheless, with oil majors now sitting on added cash, this could possibly translate to higher dividend payments.

Lacking catalyst in other parts of the value chain. Despite the improved oil prices, WGE finds that the effects are yet to be felt in the offshore services segment. Demand recovery has been slow, with rig counts only marginally higher versus 2016 levels, while new projection sanctions are unlikely to translate into substantial work programs for the next 1-2 years. While global drilling rigs utilisation has seen a minor uptick of late, it is still near its low and nowhere close to 2014 levels. Similarly, the OSV market has yet to recover from its supply overhang with day rates still barely seeing a significant recovery, while utilisation still remains low. Notably, Payne also opines that despite the global OSV market seeing a 38% write-down in asset value since 2013, current valuations may still be bloated, and hence, we may still see further impairments moving forward. With all that said, Payne added that throughout the value-chain, he sees the domestic topside maintenance space as a potential bright spot. Many maintenance works have been delayed over the past 2-3 years given the gloomy oil prices, and hence, we may expect upticks in work orders in the coming contract cycles.

Maintain NEUTRAL. Overall, we felt that the talk had largely reaffirmed our neutral view towards the sector. While we can be slightly positive given the recent oil price rally, we still find the need to be selective with stock picks within the sector. Among all, SERBADK (OP, TP: RM4.45) was selected as our top pick given its visibility in earnings growth backed by its commendable track record in earnings delivery and superior ROE against many of its peers. Meanwhile, we name DAYANG (OP, TP: RM0.98) as a beneficiary within the topside maintenance space, underpinned by the slew of recent PM-MCM contract wins, while UZMA (OP, TP: RM1.65) could also be a beneficiary of increased Brownfield activities from oil producers to immediately capitalise on the improved oil prices amidst the underlying capex-prudent landscape.

Source: Kenanga Research - 22 Oct 2018