• Cut Brent crude oil ASP forecast by 15% to USD85/bbl.

• Go for oil services in the production phase, less volatility.

• Yinson,  Bumi Armada,  Dialog  and  Perdana  are  our  preferred BUYs.

What’s New

Our  economics  team  today  cut  Brent  crude  oil  ASP  forecast  to USD85-90/bbl for 2015-16. Correspondingly, we lower the targeted PERs of  O&G  PLCs  under  our coverage to  7x-14x,  from  15x-20x,  as we  take  the  view  that  the  sector  de-rating  will  stay  for  a  while following  adverse  headwinds  (steep  fall  in  oil  price,  oversupply , etc.)  and a recovery  in oil price back to pre-October level will not happen soon.

What’s Our View

In  the  O&G  value  chain,  the  ‘exploration’  segment  (i.e.  field operations,  drilling  [jack-ups],  fabrication  services)  will  be  the primary  segments  to  experience  the  setback  first.  Operations  in the  ‘production’  phase  (i.e.  FPSO,  tank  terminals)  will  be  the least affected from capex cut, oil price weakness and volatility.

Small  independent  E&P  operators  with  high  leverage  and  P&L driven  will  be  more  sensitive  to  these  adverse  conditions  vis-à-vis the  larger  boys  with  stronger  balance  sheets  and  the  national  oil companies  (NOCs).  While  the  break-even  cost  varies  among  O&G fields,  there  will  be  less  incentive  to  develop  marginal,  shale  oil/ gas fields should oil price range between the USD70-80/bbl level.

In  drawing  comparison,  we  note  that  the  situation  in  2014  is  less severe  than  2008,  from  a  fundamental  perspective.  In  addition, O&G service providers under coverage have improved their balance sheets.  Nevertheless, a sector de-rating in inevitable. We have cut the earnings forecasts for 10 out of 13  PLCs under coverage, taking into  account  the  impact  in  2015-16  and  downgrade  calls  on  5 stocks.

Amidst the fall in share prices, we see values emerging on selected stocks.  Yinson  and  Bumi  Armada  (FPSO  operators),  Dialog  (tank terminal  services)  and  Perdana  (OSV  providers)  are  our  preferred BUYs for their quality, LT contracts and balance sheet strength.

Source: Maybank Research - 12 Nov 2014