KUALA LUMPUR: Kenanga Research mantains its Neutral view on the oil and gas sector with a positive bias where earnings still matter ultimately.
It is conservative on its oil forecast as crude prices have rallied 18% on the extension of Opec and non-Opec members' production cuts, and the market could refocus on the revival of US shale gas production.
"This is evident by US production approaching all-time high of 9.8m bbl/day. Nonetheless, any escalation of geopolitical tension would serve as a wildcard to lift oil prices one notch higher.
"All in, we maintain our conservative 2018 forecast of USD55-60/bbl capped by continuous growth in US production."
The research firm added that tendering activities have been on the rise and oil majors are reviewing projects suggesting that they are relatively more upbeat on the upstream sector following the stabilisation of oil prices.
Petronas' Activity Outlook Report 2018-2020 also showed most upstream sub-segments' activities in 2018 revised higher as compared to the previous report.
"We believe the upward revision could be due to the delayed work orders last year being pushed to 2018. Thus, this may potentially lead to better contract flows and further provide order-book replenishment opportunities for selected services players.
Kenanga Research believes that earnings improvement/recovery is still selective within different sub-segments.
"While opex-related services player such as DAYANG (OP; TP: RM0.73) and PENERGY are likely to secure higher maintenance work orders from existing/newly awarded contracts, we opine that UMWOG (Not-Rated), being the major local drillers, could benefit from the increasing jack-up rigs demand of 7-10 units for 2018-19.
"Meanwhile, OSV players such as ALAM (UP, TP: RM0.07), PERDANA (Not-Rated) and ICON (Not-Rated) are likely to prioritise vessel utilisation at the expense of daily charter rates although there are signs of rates bottoming out."
It added that fabricators would benefit at a later stage as it does not foresee massive project sanctions in the near term while rig and ship builders' prospects are expected to stay challenging.
Among Kenanga's O&G counters under coverage, its top three performers are Serba Dinamik
(+114.7% since IPO), Dialog (+60.4%) and Pantech (+44.9%), backed by the anticipation of strong earnings recovery amid volatile oil prices.
The three underperformers are Sapura Energy (-51.5%), Alam Maritim Resources (-42.4%) and Uzma (-22.3%), which experienced earnings downgrade or liquidation risk.
For the quarter, the research firm highlights Wah Seong while keeping an eye out for bombed-out counters such as UMW Oil & Gas and Icon for a valuation catch-up play should exploration activities pick up.
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