We believe that 2013 will be a good year for Malaysia’s oil & gas (O&G) industry as jobs visibility improves. This year’s focus will be on Petronas’ push for domestic production growth, which should benefit local service providers. In anticipation of multiple contract awards, we are OVERWEIGHT on the sector, with SapuraKencana Petroleum and Bumi Armada as our large-cap top picks while Alam Maritim and Perdana Petroleum are our picks among the small-caps.

Positive global demand growth to support crude oil prices. The prices of Brent and WTI crude oil prices have held steady in the past 12 months, buoyed by growing demand from emerging countries. According to the International Energy Agency (IEA), global oil demand grew +0.9% y-o-y in 2012, driven by Asia (+3.1% y-o-y), Middle East (+2.9% y-o-y) and Latin America (+2.7% yo- y) but the rise was offset by weaker demand in the Americas (-1.1% y-o-y) and Europe (-3.6% y-o-y). IEA sees global oil demand ticking up by 1.0% y-oy in 2013 while we expect oil prices to hold steady at that level.

Local O&G industry to remain robust. We expect the higher spending by Petronas and its production-sharing contractors (PSCs) to boost the dishing out of new contract. We also note that as many big projects that were mooted in 2011 were implemented from 2012 onwards, this could potentially lift the demand for support services this year. We also anticipate improvements in the charter and utilisation rates of O&G service providers.

OVERWEIGHT. We believe the Malaysian O&G sector will be vibrant in the next three to four years in view of Petronas’ commitment to ramp up local production. Production aside, exploration activities are also expected to be robust. As such, we lift our target PE for some of the companies under our coverage by 2x-3x forward earnings as they stand to be key beneficiaries from the robust activities in the sector.

Source: RHB Research - 18 Mar 2013