• During recent 2Q24 result season, we are pleasantly surprised with MMHE’s earnings that came well above our expectation. This has re-affirmed our belief that its turnaround story remains intact, further underpinned by upcoming commencement of its offshore windfarm fabrication jobs in 2025.

• Overall, performance of other companies under our coverage were largely within expectation except for PChem as it was dragged by losses at new Pengerang Integrated Complex (PIC).

• We expect oil and gas companies to continue with its planned upstream capex spending as economics of project development remain viable underpinned by favorable oil price of above USD70/bbl. Hence, we remain in favor of upstream services companies particularly those in drilling and fabrication activities, supported by attractive valuation.

• Maintain an OVERWEIGHT stance on the Oil and Gas particularly on upstream players. Our top pick remains as the following: MMHE (TP: RM0.94), Velesto (TP: RM0.34), MISC (TP: RM10.30), and Hibiscus (TP: RM3.40).

MMHE and Dayang Excel while Others Meeting Expectation

To recap, we have been bullish on the earnings for oil and gas companies for quite some time, particularly the upstream services companies. This is against the backdrop of rising offshore activities amidst upcycle in upstream spending. Indeed, both MMHE and Dayang surpassed our expectation during 2Q24 result season as both companies registered larger-than-expected earnings in 1H24, making up 89% and 74% of our estimate respectively. Meanwhile, other stocks within our coverage performed largely within expectation except for Petronas Chemicals (PChem). The company was affected by higher OPEX at PIC following the successful performance test run (PTR) at 5 plants ahead of the expected commercial operation date (COD) status in 2H24.

Oil Price Remain Favourable for Upstream Development Projects

Overall, we observed that most oil and gas companies have largely recovered from the sector downturn earnings cycle. This is evident from healthy asset utilisation rate that was achieved by Dayang and Velesto at 91% and 98% respectively. Similarly, the dayrate has somewhat reached close to the peak cycle rate. Having said that, we believe this has been well reflected in the share price, particularly those companies with exposure to brownfield services. However, we note that the stock price for greenfield players such as MMHE and Velesto still lagged behind, probably due to market concern on potential Petronas’ CAPEX deferral. Notwithstanding, we remain optimistic on the upcycle in offshore spending as current oil price of c.USD70-80/bbl is still favourable towards new development project.

Maintain OVERWEIGHT Call on Oil and Gas Sector

All in, we maintain an OVERWEIGHT stance on the Oil and Gas particularly on upstream players. Our top pick remains as the following: MMHE (TP: RM0.94), Velesto (TP: RM0.34), MISC (TP: RM10.30), and Hibiscus (TP: RM3.40).

Source: BIMB Securities Research - 5 Sept 2024