KUALA LUMPUR: UOB Kay Hian Malaysia Research is maintaining its oil and gas sector theme that internationally competitive companies not reliant on local jobs are likely to see earnings re-rating.
It said on Friday it prefers Bumi Armada
and Petronas Dagangan and maintained its Market Weight for the sector.
The research house said Petroliam Nasional's (Petronas) 3Q17 earnings remained stable. Capex surged slightly mainly to support the progress of the Refinery and Petrochemical Integrated Development (RAPID) project in Johor.
“We believe LNG is a significant earnings risk going forward. Petronas has reaffirmed its downstream focus, and this is not likely to benefit local upstream players even if oil prices recover.,” it said.
UOB Kay Hian Research said Petronas' 9M17 net profit of RM30bil (ex-impairment) was an improvement from the RM25bil in 9M16. The major improvement was in upstream, supported by higher oil and gas prices despite lower entitled volumes (-1% on-year). Downstream profit also improved on stable plant utilisation and new contribution from SAMUR.
On cash flow, Petronas' year-to-date capital expenditure (-6% on-year to RM34bil) and cost control (-7% on-year to RM33b) continued to be tight, although capex surged on-quarter in 3Q17, mainly for RAPID.
The Pengerang Integrated Complex was 81% completed as at November 2017. Hence, gross gearing also increased slightly on-quarter from 17.1% to 17.4%.
Despite the capex surge, operating cash flow generation-to-capex outflow ratio of 1.4 times was in line with peers’ average of 1.65 times.
The research house said it was difficult to identify silver lining for local upstream O&G companies. Even though there may be more umbrella contracts - for OSVs; maintenance, construction and modification (MCM) contracts; and rigs - these are at best only able to partially replenish orderbooks for selected contractors.
“Despite higher oil prices, it appears that the local sector earnings for most upstream players are likely to remain discorrelated,” it said.
The research house said the sector rating still depended on earnings. It retained its sector Market Weight as sector valuations have decoupled away from oil prices since 2016.
“This is because local O&G stocks are not benefitting from earnings visibility. Our sector theme remains unchanged: invest in companies that have visibility for earnings upgrades and do not depend on Petronas work orders. In this sense, FPSO players remain the clear sector earnings driver in 2017.
“We like Bumi Armada (Target: RM1.06) as its earnings will re-rate once it fully executes the final completion of Kraken and Olombendo by 1Q18. We like the defensive features of Petronas Dagangan (Target: RM27.90), given its strong cash flow in an environment of a mild uptrend in oil prices.
“Although we have a Hold on Yinson Holdings (Target: RM3.75), valuation may see upward revision if it secures more new contracts, including the FPSO Layang and another mega international FPSO job.
“Although Sapura Energy (Target: RM1.32) is also a reputable international O&G contractor, its earnings are still in a downgrade cycle due to declining rig utilisation and a significant gap in orderbook replenishment of about RM3bil,” it said.
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