CIMB Equities Research expects Dialog Group Bhd to deliver strong earnings growth from next year onwards.
KUALA LUMPUR: AmInvestment Research is neutral on the oil and gas (O&G) sector due to the likely continued volatility in the oil price direction over the next six months.
In its research note issued on Friday, it also cited lingering balance sheet risks of Malaysian operators, unresolved US trade dispute, deteriorating global economic growth outlook and easing of US pipeline constraints.
“Our top picks are still companies with stable and recurring earnings such as Serba Dinamik
and Dialog Group.
“We like the recurring income business model of Dialog and Serba Dinamik, which are involved in operation and maintenance services while Dialog’s earnings visibility is further secured by the Pengerang Deepwater Terminal project with its enlarged buffer zone,” it said.
AmInvest Research said it may upgrade the sector to overweight if rising geopolitical tensions drive crude prices sustainably above US$70 a barrel, an easing of US trade war sanctions and a resurgence of global economic growth expectations.
However, it may downgrade to underweight due to: 1) higher-than-expected shale production and earlier-than-projected transportation bottleneck alleviation; 2) slower-than-expected global economic growth against the backdrop of worsening
trade tensions; 3) accelerated adoption of fuel-efficient-cum-electric vehicles that could reduce consumption and lead to “peak oil demand”; 4) non-compliance by Opec members to their agreed quotas, which will again lead to aggressive measures to regain market shares; and 5) increasing exit from oil and gas stocks by ESG-compliant global funds.
It said volatility persisted amid its unchanged 2019–2020 crude oil forecast at US$65 to US$70 a barrel.
With US crude inventories slipping slightly by 3% since early June to 468mil barrels and Brent crude prices declining to US$63 while averaging US$66 to date, it maintained its 2019–2020 price forecast at US$65-70/barrel, which has been our forecast since Dec 3 last year.
AmInvest Research said the EIA’s Short-Term Energy Outlook has regularly revised its 2019 Brent oil projection from US$61 to US$70 over the past 6 months, currently settling at US$67. This is also its 2020 Brent oil price projection which has remained constant for the past one month, following a revision from US$62/barrel earlier this year.
The changes stem from high market volatility given multiple demand-supply dynamics amid geopolitical strife in the Middle East and Venezuela while global demand expectations may be impacted by the persistent on-off trade tensions between the US and China, and potentially Europe.
However, AmInvest Research also highlighted lingering balance sheet risks in the sector.
Notwithstanding crude oil price having risen by 17% since the beginning of the year to US$63 currently, balance sheet risks linger with a number of players still under PN17 financial distress status such as Barakah Offshore Petroliam, Perisai Petroleum Teknologi, Daya Materials and Sumatec Resources.
“We note that while Bumi Armada has successfully refinanced its unpaid US$380mil debt, the possibility remains that the group may still need to undertake a highly dilutive equity-raising exercise amid a depressed share price given that it has secured a 30% equity stake in an India-based FPSO which could cost over US$1bil,” it said.
AmInvest Research said Petronas’ 1Q2019 capex fell 31% YoY and 59% QoQ to RM8.3bil, which was used mainly for upstream spending with the US$27bil Pengerang Integrated Complex (PIC) in Johor reaching 99% completion.
“We do not view this decline as alarming for the upstream sector as this could be partly due to multiple projects’ timing of cost recognition and does not signal upcoming cost cutbacks given that Petronas’ 2019–2021 Activity Outlook projects a gradually rising utilisation of rigs, vessels, pipeline/offshore installations next year,” it said.
Based on Petronas’ estimates, jack-up rig usage had been revised upwards to 16-18 this year from between seven and 10 forecasted by the group in its 2018-2020 outlook in the previous year.
Likewise, Petronas’ 2019 projection for offshore installations has been raised to eight to nine from six to seven.
“We note that 2018 capital expenditure rose 5% YoY to RM46.8bil, driven by a 2.8 times surge in spending for international projects despite a 32% contraction for Malaysia as the Refinery and Petrochemical Integrated Development (RAPID) in Johor has reached almost full completion,” it said.
AmInvest Research also pointed out contract awards declined 56% YoY and 60% QoQ to RM2bil in 1Q2019, largely due to Sapura Energy securing lumpy central processing platform jobs for the Pegaga project off Sarawak in 1Q2018 together with the developments for the Hokchi field in the Gulf of Mexico and KW-DWN 98/2 block off India in 4Q2018.
Nevertheless, offshore projects in Brazil, Mexico, the Middle East and West Africa may be still poised to gain traction with Sapura and MMHE being selected for Saudi Aramco’s Long Term Agreement programme, which allows them to bid for the kingdom’s massive offshore projects that could reach US$150bil over the next 10 years.
Westwood Global Energy Group is projecting global drilling and well services expenditure to grow 19% to US$1.9tril for 2019-2023 from 2014-2018.
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