Reading through Petronas Activity Outlook 2020-2022, the takeaways were mostly positive, as we are comforted that upstream activity levels will stay mostly elevated from 2019 levels. We identified value chains that could emerge as key winners to be: (i) offshore fabricators (e.g. MHB, SAPNRG), on huge surge in number of WHPs, (ii) marine vessel providers (e.g. PERDANA, ALAM, COASTAL, ICON), with a rise in demand, especially for AHTS, and (iii) offshore maintenance providers (e.g. DAYANG, CARIMIN) with continued rise in man-hours demand for 2020 spilling from a strong 2019. Meanwhile, drilling rig demand is also expected to maintain at 2019 levels, which would benefit the likes of VELESTO to sustaining high utilisation rates, with its rig fleet currently already being fully chartered out. Although we maintain NEUTRAL on the sector, given limited upsides for Petronas-related counters, the increased sanguinity for equipment and services providers further confirmed our bullish industry view.

Upstream activities to stay elevated. Petronas has just released its latest Activity Outlook for 2020-2022. Summarising our read-through, we are positive on the activity outlook, and feel comforted that upstream activities would continue to stay elevated from the surge in 2019. Most of the upstream value chains are expected to see approximately maintained activity levels as in 2019, with several of them anticipated to see a surge.

Value chains to look out for. More specifically, we identified that the biggest rise in activities would come from: (i) offshore fabrications, especially for wellhead platforms (WHP), which almost saw a doubling in number of projects, (ii) marine vessels, which are expected to see a rise in demand for AHTS, PSVs, SSVs and other forms of support vessels, and (iii) maintenance, construction and modification, which is expected to see a peak in man-hours for 2020 despite a strong year in 2019. Meanwhile, most of the other value chains are expected to see maintained activity levels as in 2019. Notably: (i) drilling – jack-up demand is expected to remain at ~16 rigs, (ii) hook-up and commissioning flattish at ~4.6m man-hours, and (iii) decommissioning – is expected to see a slight dip in number of wells for 2020, before a surge in 2021.

Biggest beneficiaries from the outlook. We identified big winners from Petronas’ Activity Outlook to include: (i) fabricators – e.g. MHB and SAPNRG, to benefit from the surge in numbers of WHPs, (ii) marine vessel providers – e.g. PERDANA, ALAM, ICON, COASTAL, to benefit from the huge rise in OSV demands, and (iii) offshore maintenance players – e.g. DAYANG, CARIMIN, which will continue to enjoy increased MCM work orders. Meanwhile, VELESTO, which rig fleet are currently fully chartered out, is expected to continue to enjoy high utilisation rates amidst sustained drilling rig demand.

Maintain NEUTRAL, given limited upsides on large-cap Petronas-related counters, albeit with increased sanguinity within the service and equipment providers. If anything, we believe this latest Petronas Activity Outlook 2020-2022 should give assurance of maintained elevated upstream activities, thus benefiting a slew of the local names. As for stock picks, with most of them having seen strong YTD gains, we see laggard-play angle in some fabricators (i.e. MHB, SAPNRG), which are still trading at discounted valuations despite multi-year’s high order-books. Meanwhile, for OSV players, we prefer COASTAL given that it has the healthiest balance sheet within the sub-segment.

Source: Kenanga Research - 16 Dec 2019