Affin Hwang Research said across the value chain, production players will be the first to benefit from higher oil prices due to their oil-producing fields.
KUALA LUMPUR: Affin Hwang Capital Research is turning more positive on the oil and gas sector as it believes the downside risk to both global oil prices and share prices has declined, reflecting a more attractive risk-reward profile for investors.
It said on Wednesday this was achieved through prominent decisions by both Opec and non-Opec countries. While it expects oil to trade in the US$50 to US$55 range in 2017, this may be sufficient for oil majors to relook and raise their initial capex plans.
“We expect contract flows and corporate earnings growth to show a gradual recovery. We upgrade our sector rating to Neutral (from Underweight),” it said.
Affin Hwang Research said across the value chain, production players will be the first to benefit from higher oil prices due to their oil-producing fields.
Shipyards, fabricators, exploration drilling operators and offshore support vessels (OSV) providers will likely to be at the tail end of the recovery.
“For sector exposure, we prefer companies that are involved in the production space as compared to exploration,” it said.
The research house said the total announced contract value in 2016 fell 49% yoy to RM12.5bil versus RM24.5bil in 2015.
It observed that contract value bottomed in 2Q16 at RM1.5bil, the lowest level seen since 2012. Nevertheless, it expects contract flows to pick up in 2017 based on the visible tender pipeline and as oil majors revisit their capex plans on stabilising global oil prices.
“We look for an overall sector earnings decline of 14% on-year in 2016 and a gradual recovery of +4% on-year in 2017 and +11% on-year in 2018, based on prevailing consensus views.
“While we are more positive on the sector, we have also highlighted a few companies with heightened financial risks based on our cash flow financial analysis of the Malaysia O&G universe,” it said.
Affin Hwang Research introduced its average Brent oil price assumptions of U$D55 for 2017 and US$60/bbl for 2018, US$5 higher than previously, on expectations of a faster-than-expected drawdown in inventories following the Opec and non-Opec joint effort in cutting production levels.
“We increase our TPs for Petronas Chemical, SapuraKencana and Petra Energy, as we expect these three stocks to be the direct beneficiaries of more bullish oil prices.
“We also revise our TPs for Petronas Gas, Dialog and Bumi Armada
as we streamline our valuation assumptions. We downgraded MMHE to Hold from Buy; upgrade Petronas Chemicals and SapuraKencana to Hold from Sell; Bumi Armada and Petra Energy are upgraded to Buy from Hold.
“We upgrade our sector view to Neutral (from Underweight), supported by both top-down and bottom-up analysis. The current outlook suggests downside risks to oil prices are looking more benign and, due to higher oil prices, we believe Malaysia sector contract flow could start to improve in 2017 as oil majors revisit capex plans.
“Taking that into consideration, we have also taken a bottom-up approach in selecting stocks and recommend those with low short-term liquidity risk (after conducting cash-flow analysis) and good growth catalysts that could outperform peers. In the large-cap space, we like Bumi Armada (TP: 76 sen) as our top pick, while Petra Energy (TP: RM1.09) is our small-cap top pick,” it said.
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