The share prices of most oil & gas stocks under our coverage may have rallied strongly YTD, but we see more upside in some earnings-resilient stocks,  boosted  by: i) Petronas’ MYR300bn capex from  2011-2015,  ii) long-term contracts with favorable value, and iii) oil prices ranging from USD90/bbl-USD100/bbl.  We  keep  our  OVERWEIGHT  call  on  the  sector, with  SapuraKencana  Petroleum,  Dayang  and  Favelle  Favco  being  our top large- cap, mid-cap and small-cap picks respectively. 

- Investors  can  still  make  money.  We  believe  that  our  valuations  for most  of  the  oil  &  gas  companies  under  our  coverage  are  justified, premised  on  the  following  assumptions:  i)  Petronas  has  allocated MYR300bn capex for the 2011-2015 period, ii) oil prices are expected to stay  above  USD80/bbl,  and  iii)  there  is  little  risk  to  earnings  growth  for selected stocks under our coverage given the long-term nature of recent contracts. 

- Contract  dynamics  have  become  more  long  term.  Looking  at  the recent major contracts awarded (please see  Figure 20), we believe that the  long-term  nature  of  these  jobs is  favourable  for  service providers  in terms of capex planning and earnings visibility. Hence, over the next few years, we prefer offshore asset owners and service providers with good track records such as Dayang, Alam Maritim and Perdana Petroleum. 
 
- Maintain OVERWEIGHT. We keep our OVERWEIGHT on the oil & gas sector,  with  our  large-cap,  mid-cap  and  small-cap  picks  being SapuraKencana  Petroleum  (SAKP;  BUY,  FV:  MYR4.96),  Dayang (DEHB;  BUY,  FV:  MYR6.50)  and  Favelle  Favco  (FFB;  BUY,  FV: MYR3.35)  respectively.  We  also  see  Wah  Seong  (WSC,  BUY,  FV: MYR2.50) as our top turnaround story as the company is on the road to recovery  and  is  poised  to  benefit  from  the  robust  offshore  activities  in Malaysia.

Source: RHB