Brent crude prices has rebounded healthily (+26% YTD) after bottoming-out last December, driven by involuntary production cuts in Venezuela, Libya and Iran, on top of OPEC 11’s compliance towards a production cut (107% compliance as at Feb-2019). That said, we see a stabilised range of USD60-70/barrel for Brent crude as a comfortable level for oil majors to increase productions and capex, although continued commitment from OPEC towards production cuts beyond the current June-2019 cut-off may still be key, with our assumptions projecting a 2019 average of USD65/barrel. Additionally, on the back of under-investments in the previous few years, we are expecting to see increased global project FIDs (~+10% in terms of project numbers), largely driven by massive new fields in the Middle-East, while locally, Petronas is also expected to increase capex to >RM50b, of which ~RM30b is for upstream, after focusing much on downstream for the past several years. Overall, we see fabrication players (e.g. MHB, SAPNRG), especially ones with established global presence, as potential beneficiaries of increased upstream investments. A rise in global FPSO tenders could also potentially benefit the likes of MISC and YINSON. All-in, we maintain our NETURAL call on the sector, given limited upsides to Petronas-linked counters. With balance sheet resilience and earnings visibility still the key selection criteria, we continue to favour names such as SERBADK and YINSON, although we highlight SAPNRG (top-pick for the quarter) as a prime beneficiary for increased global and local upstream activities, coupled with its potential turnaround and limited downside risks.

Brent oil prices steadying at USD60-70/barrel range. Brent crude prices saw an impressive 26% rebound YTD after capitulating to a low of ~USD50/barrel in late Dec-2018. This was largely driven by involuntary production cuts in Venezuela, Libya and Iran, coupled with OPEC 11’s (eleven OPEC members bound to the production cut pact) production cuts compliance, mitigating slowing demand growth concerns. To recap, in Dec-2018, OPEC, in consortium with several other nations (all referred to as OPEC+), has pledged cuts of 1.2m barrels per day from its Oct-2018 benchmark. In fact, data have shown that OPEC 11’s production cut compliance had reached an impressive 107% as at Feb-2019, improving from Jan-2019 of 79%, although Russia’s compliance (being the largest non-OPEC nation within the production cut pledge) still remained lacklustre at only 35% in Feb-2019 (albeit improving from Jan-2019 of 18%). Overall, we feel a stabilised Brent crude price range of USD60-70/barrel to be “sensible”, with oil majors comfortable with production and capex spending within this price range, although OPEC’s commitments towards continued production cuts beyond its current agreedupon June-2019 cut-off may still be playing a pivotal role. Our assumptions project a 2019 Brent price average of USD65/barrel (revised from USD60/barrel last quarter).

Increased upstream investments, both globally and locally. Moving forward, we expect to see mild rises in upstream capex investments both on the global and local-front. Recovering from under-investments in the previous few years given the oil price weakness, global project FIDs is expected to see an uptick in 2019 (~+10% number of projects, but ~+160% in terms of bboe volumes), largely driven by massive new fields in the Middle-East (e.g. Marjan, Zuluf and Berri). Meanwhile, on the local front, Petronas is also expected to increase its 2019 capex to >RM50b, of which ~RM30b will be for upstream. This comes after it constrained upstream capex for the past several years as Petronas focused its capex efforts on the downstream. We believe the upstream capex could be used for new fields under development (e.g. Kelidang, Limbayong, Kasawari, etc.) as well as recent discoveries (e.g. recent massive discovery in South Sumatra).

Key value-chains to watch. While overall contract flows have still yet to see any impressive surge, we feel that there may be certain value-chains that we can keep an eye on given the current industry landscape. Firstly, we believe fabrication players (e.g. MHB, SAPNRG) could benefit from increased upstream investments, especially ones with established global exposures as it would allow them to capitalise on potential jobs from Middle-East massive fields. Particularly, both MHB (in consortium with TechnipFMC) and SAPNRG are shortlisted candidates under the Long-term Offshore Agreement, allowing them to bid for offshore jobs from Saudi Aramco. Meanwhile, we have also noticed an increase in global FPSO activities, potentially benefiting local players such as YINSON and MISC. With the number of upcoming green fields, we may also see these two as potential beneficiaries, while YINSON is also actively bidding for jobs in Brazil and Ghana. Offshore maintenance players (e.g. DAYANG) could also see an increase in work orders as compared to 2-3 years ago given deferments throughout the down years, while names with E&P exposure (e.g. HIBISCS, SAPNRG) may see less volatile earnings amidst the more stabilised oil prices.

Source: Kenanga Research - 3 Apr 2019