We  maintain  OVERWEIGHT  with  selective  sectoral  themes.  While sentiments remain  strong  on RAPID, EOR  and RSC,  we  believe  RSC  is an overplayed theme in the small-cap space and expect interest to wane once  news  flow  becomes  more  fluid.  More  trading  opportunities  may arise  from  the  next  shariah  compliance  review.  Our  top  BUYs  are SapuraKencana Petroleum, Dayang, Coastal Contracts and Wah Seong.

• PIC  gets nod.  Petronas’ approval of  the Pengerang  Integrated Complex (PIC)  project  last  week  did  not  surprise  the  market.  We  believe Muhibbah  Engineering  will  be  a major  beneficiary  of  this  development. Other  potential  beneficiaries  are  Dialog,  Petronas  Chemicals,  KNM (KNMG MK, NR), Barakah Offshore Petroleum (BARAKAH MK, NR) and Malaysia Marine and Heavy Engineering (MMHE).
• EOR  theme  remains  strong.  The  production  sharing  contractors  are determined  to  develop  fields,  mainly  centred  around  enhanced  oil recovery (EOR) efforts.  Petronas has five EOR projects in the pipeline. Other than the offshore structure fabricators like SapuraKencana, MMHE and  TH  Heavy  Engineering  (RH  MK,  NR),  chemical  injectant  suppliers such as Dialog may benefit from such efforts by Petronas.
• RSC an overplayed theme. While share prices of small-cap risk service contract  (RSC)-related  players  such  as  Uzma  (UZMA  MK,  NR)  and Scomi Energy  Services (SES  MK, NR)  had an incredible run in CY13,we believe premiums for such stocks will wane once news flow on RSCs becomes more fluid. Uzma’s recent price correction  is  a  testimony that market expectations have been priced in.
• Potential changes in shariah  status.  The  next shariah-compliant stock list  update  in May 2014  could see some changes. Our simulation (see left  exhibit)  identifies  five  companies  that  are  approaching/have exceeded  the 33% limit of conventional cash/debt-to-asset ratios.  Bumi Armada  and  Yinson  are  currently  non-shariah-compliant,  while  Wah Seong,  SapuraKencana  and  Perdana  Petroleum  are shariah-compliant stocks.
• Maintain OVERWEIGHT.  Our Top Picks are SapuraKencana,  Dayang, Coastal Contracts and Wah Seong. 

Oil & Gas: Strong Selective Sectoral Themes

Time to take profit on selected small-cap stocks 
After  a long drought of news on  RSCs  in CY13,  market  interest in marginal oilfield is once  again  rejuvenated  upon  the announcement  of  two  recently-signed  contracts. The  Uzma  and  EQ  Petroleum  Developments  Malaysia  SB  30%:70%  joint  venture (JV) has been awarded a contract to develop Tanjung Baram, off Lutong in Sarawak. Petronas’  wholly-owned  marginal  field  expert  Vestigo  Petroleum  was  awarded  the RSC to develop and manage Tembikai in Terengganu, albeit without a partner  –  a deviation from the other four RSCs.

While stock  prices  of  small-cap, RSC-related  players  like  Uzma and Scomi Energy Services had an incredible run in CY13,  we believe premiums for  such  counters will wane once news  flow on RSCs become more fluid. Uzm a’s recent price correction is a testimony that market expectations have been priced in. Therefore, we believe that the  next  catalyst,  barring  any  negative  development,  will  be  the  execution  of  the RSCs by the respective winners.

Other potential RSC winners to look forward to? 
There  were  at  least  10  fields  up  for  bidding  last  year  but,  excluding  the  first  three RSCs, ie  Berantai, Balai and  the  Kapal-Banang-Meranti cluster,  only two have been announced  thus  far. We do not discount the  possibility  that the first-generation RSC winners,  SapuraKencana Petroleum (SAKP MK,  BUY, FV: MYR5.61), Dialog (DLG MK, BUY, FV: MYR3.71) and Petra Energy (PENB MK, NEUTRAL, FV: MYR2.43), will still be interested in securing more such contracts. These companies’  successes in hitting first oil within  their respective fields  are  testament to their capabilities. As such,  we  will  not  be  surprised  if  they  decide  to  commit  to  a  second  RSC  on  a standalone basis.

RSC projects of such scale require  huge capex.  Other  O&G  players that we believe will  be financially capable  of undertaking  such projects are Bumi Armada (BAB MK, BUY, FV: MYR4.45) and Wah Seong Corp (WSC MK, BUY, FV: MYR2.25). 

Source: RHB