• The Edge reported that Petronas is close to announce the winner for the new offshore MCM contract. While these contracts are greatly beneficial for the contract winners as it boosts earnings visibility, we are concerned with the status quo of the incumbents amidst rising competition from newcomers.
   
• Among the maintenance players under our coverage, we favor T7 Global as it could emerge as a strong contender for MCM contracts, potentially converting some of its RM4bn tenderbook into orderbook.
   
• Maintain an OVERWEIGHT recommendation on Oil and Gas sector. Our top pick are MISC (TP: RM10.30), MMHE (TP: RM0.94), Velesto (TP: RM0.34) and Hibiscus (TP: RM3.40).

The Contract Award for Offshore MCM is Around the Corner

Petronas is on the verge of announcing the winner for offshore maintenance, construction, and modification (MCM) new contract. According to Petronas Activity Outlook, the MCM covers activities related to repair and maintenance of existing topside facilities and it involves both scheduled and unscheduled maintenance. The associated services required for MCM contract typically includes supply vessel, inspection services, blasting, painting services and more.

The Edge reported that the new MCM contract is expected to run for 5 years beginning 2025 with a 3+2 years extension option. It is said to be broken up into 15-16 packages with average value for each package is RM500mn. In addition, the value for each package could double to RM1bn if the option to extend for another 5 years is exercised by the company. To recap, the existing MCM contract will expire by end of 2024. The incumbents are Dayang, Petra, Carimin, Deleum, Sapura Energy, and Barakah.

Advantage and Drawback of MCM Contracts

Owing to the need to conduct regular maintenance to ensure the safety of offshore operation, maintenance activities are typically the least affected by the cyclicality of oil and gas sector. Hence, this provides steady and recurring income to the contract winners. However, there are some drawbacks: (i) the competition are rising as the defensive nature of the business attracts more companies to provide similar services, (ii) the contract value are uncertain as the actual work orders are based on call-out requirements by the field operator, and (iii) the services are typically labour intensive with low differentiated service offerings.

T7 Global Could Surprise the Market

Under our coverage, Dayang, Sapura Energy and T7 Global are companies that compete within maintenance services. Dayang is one of the largest MCM service provider in Malaysia while Sapura Energy and T7 Global are also vying for a portion of the MCM packages. Among these players, we favor T7 Global (BUY, TP: RM0.62) as it is rapidly emerging as a credible Oil and Gas service provider. As a small cap counter with the potential for orderbook expansion, we think the market has yet to price in its potential to secure new MCM contracts. As at end 2Q24, its orderbook stood at RM2.8bn whilst tenderbook exceeds RM4bn. Meanwhile, Dayang (TRADING SELL, TP: RM2.25) is in need to replenish its orderbook that has fallen from the peak of RM4.5bn in 4Q19 to RM1.4bn in 2Q24. However, at this juncture, we think the stock price has fairly reflected the potential orderbook replenishment from the new MCM contracts. On the other hand, the impact to Sapura Energy (TRADING BUY, TP: RM0.06) stock price may be limited regardless of the outcome of the MCM contracts as investors are paying more attention towards the progress of its debt restructuring plan.

Source: BIMB Securities Research - 16 Oct 2024