KUALA LUMPUR: Affin Hwang Capital Research retains Buy calls on Dialog, Serba Dinamik, Velesto Energy, Bumi Armada and Kelington as it maintains its Neutral stance on the oil and gas sector.
It said on Monday lLarge cap Petronas related names, with the exception of MISC have underperformed the broader FBMKLCI index, while stock prices of small-mid cap companies have outperformed, on the back of higher activity.
“As we move into November, focus will be on corporate earnings. We highlight that maintenance and rigs players could post stronger 3Q results benefiting from higher job flows.
“Contract flows are likely to see stronger ramp-up to make up for the underspending from Petronas in 1H19, ” it said.
Affin Hwang Research has Buy calls on Dialog, Serba Dinamik, Velesto Energy, Bumi Armada and Kelington. Maintain our Neutral stance on the sector.
The research house pointed out Petronas has significantly underspent on capex totalling RM16bil in 1H19 or 32% of its full year RM50bil target.
“The guidance is still unchanged, showing its commitment to roll out more contracts in the coming months. Out of the RM50bil, Petronas has allocated half for domestic projects. We believe activities will remain robust, with domestic upstream capex also guided to be higher at RM15bil vs RM8bil in 2018, ” it said.
The research house pointed out jack up rig demand in Malaysia has steadily improved from 10 operational rigs in 1Q19, to 13–14 rigs in 2Q-3Q19.
This is in line with 16 to 18 rig requirements according to Petronas’ Activity Outlook. Daily charter rates (DCR) in the South East Asia region for jack up rig with water depth more than 350ft is now in the range of US$65,000 to RM95,000
(vs US$55,000 to US$65,000 in January 2019); less than 350ft current DCR at US$48,000 to US$65,000 (vs US$45,000 to US$60,000 before).
“We gather that offshore maintenance players are likely to post strong 3Q19 profits. This includes the maintenance, construction, modification (MCM) contract beneficiaries like Deleum, Carimin, Dayang and Petra Energy (Non-rated).
“We understand that first two, which operate in Peninsular Malaysia waters are servicing 1 additional platform shutdown vs 2Q19, while the last two names are likely to benefit from higher hook-up commissioning work quarter-on-quarter, ” it said.
Affin Hwang Research prefers companies with more exposure to the brownfield work and good earnings visibility.
It likes Dialog and Serba Dinamik (maintenance), Velesto Energy (jack up rigs), Bumi Armada (FPSO, a recovery story with more potential positive newsflow), and Kelington (promising long-term industrial gas story).
However, in view of the recent sector run-up and some stocks under its coverage nearing its fair values, we recommend to take profit on upcoming strong 3Q result announcements, as 4Q/1Q are seasonally weak due to monsoon.
“Any potential upgrade to our Neutral call on the sector hinges on 1) stronger recovery in global oil prices, 2) faster roll out of contract awards, and 3) work orders leading to better corporate earnings improvement. Further downside risks would be affected by the hold back in clients’ capex spending adversely impacting work activities, ” it said.
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