O&G sector momentum to pick up from second quarter 2017

New high for Dagang NeXchange Bhd

PETALING JAYA: The momentum of the oil and gas (O&G) sector in the country is expected to pick up from the second quarter (Q2 17), thanks to cyclical recovery and high productivity.

Maybank IB Research, which is positive on the sector,  said it expect further pick-up in momentum in Q2 17 as volatility has receded, confidence has improved and costs have reset.

“The sector is on a cyclical recovery, as the oil market re-balances and capital expenditure (capex) grows. We expect stronger quarters ahead, as the sector moves into high productivity periods. 

“Our crude oil price assumption of US$53/bbl average for 2017 (Jan-May 17: US$54/bbl) is unchanged. We remain positive on the sector. Our key stock buys are Sapura Energy, Yinson, Dialog and Wah Seong,’’ Maybank IB said.

Elaborating further, the research house added that Organisation of Petroluem Exporting Countries (Opec) and non-Opec members recent extension of production cut (1.8 million barrels per day (bpd)) to June 2018 is market neutral but the commitment to drive down global stockpile is commendable, reflecting strong compliance and collaboration among members. 

On the domestic front, Petronas RM60bil capex commitment for 2017 (+20% year-on-year) is a positive, it noted, adding that the brokerage is slowly seeing a revival in upstream activities (i.e. rising drilling works).

Tenders pipeline are also on the rise, of which most (i.e. offshore support vessels (OSV), maintenance) are back-loaded in in the second half of this year, Maybank IB said. 

Commenting on its stock picks, the research house said it liked Sapura Energy as is a direct proxy, beta play for a recovering O&G sector outlook. Furthermore, it added monetising its gas assets is a catalyst not fully priced in yet.

As for Yinson, it is because of its undemanding valuations with strong earnings growth prospects, cashflow strength and proven execution capabilities, the research house noted. 

Its re-admission as a syariah compliant stock is another positive, Maybank IB said.

With Dialog, it is a direct proxy to Petronas Rapid and Pengerang play and another steady, long term growth story with much upside potential and cashflows/dividends to boot.

Wah Seong has strong earnings visibility over the next three years, backed by the EUR600mil NS2 job and inexpensive valuations vis-à-vis growth, the research house said. 

Maybank IB noted that Q1 17 results were generally in line, as out of the seven stocks under coverage whose results were released last month, five, or 71% came in line. 

One i.e. Dialog, came in above ours/consensus, leading to upgrades in earnings estimates (+13-38%) and target price (TP) (+16%).

Conversely, Barakah disappointed, mainly due to the slowdown in work orders and acute delay in its call-up operations (Pan Malaysia T&I), which led to a cut in earnings and downgrade in call to sell. 

On a y-o-y basis, Q1 17 was an improvement for the sector, on higher crude oil price (+35% y-o-y to US$54/bbl average) and improved cost management. Q1 16 was a period in transition, affected by cost cuts/contracts revisions and delays, 

Meanwhile, Saudi Aramco acquiring a 50% stake at Petronas refinery and cracker facilities for US$7bil is sector positive, Maybank IB said. 

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