MIDF Research positive on SapKen, Gas Malaysia, KNM

Consumption of the fuel the past four weeks was at the highest level since September.

KUALA LUMPUR: MIDF Equities Research is maintaining its Buy call on SapuraKencana Petroleum, Gas Malaysia and KNM Group as it reviews its investment strategy  for the oil and gas sector in Malaysia.

It said on Wednesday this was based on the effectiveness of company management to synchronise and rationalise operating cost in tandem with revenue.

It has a buy on SapKen with a target price RM2.72, Gas Malaysia (RM2.92) and KNM Group (59 sen). 

“As we are positive on downstream segment of the oil and gas value chain, we prefer stocks with Petronas refinery and petrochemical integrated development project (RAPID) exposure,” it said. 

MIDF Research recommended downstream specialty companies such as KNM Group and Muhibbah Engineering (target price: RM3.05). 

It also said its Buy recommendation on Gas Malaysia was based on its positive view that the adoption of the Incentive-Based Regulation (IBR) regime will provide better earnings visibility and predictability.

“The quest to reduce operating cost and increasing operating efficiency is an ongoing initiative by local oil and gas service providers. However, not all companies are able to meaningfully reduce operating costs in light of declining revenue,” it said.

Companies which show improvement in managing operating costs in the midst of declining revenue are SapKen, Gas Malaysia, Petronas Gas, Deleum and KNM Group

“Maintain Positive on downstream and Negative on upstream with revised 2016 average Brent crude oil price assumption of US$45 per barrel (previously US$40),”  it said.

MIDF Research pointed out that Brent crude oil price has staged a significant rebound of approximately more than +41% year-to-date to reach a 2016 high of US$51.44.

The average Brent price year-to-date currently stands at USD39pb. In view of the steeper than expected rise in Brent crude price, it revised its 2016 average Brent price forecast upwards to US$45 from US$40 previously.

“New norm in contract values. Despite the steep increase in crude oil price, we do not believe that offshore activity contract values, charter rates or fabrication rates will reach that of 2011-2014 levels when crude oil prices were hovering above US$100. 

“Even if oil prices were to sustain at current levels and possibly trade beyond US$50 for a prolonged period, it is likely that the value of new projects, contracts and charter rates would see a significant decline in terms of value compared with the glory days of US$100 oil. 

“As such, oil and gas service providers would need to adjust their respective cost structures to be in-line with the new norm in revenue in order to preserve profit margins and remain profitable,” it said.

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