KUALA LUMPUR:AmInvestment Research upgraded the oil and gas sector to overweight from neutral given stabilising crude oil prices above US$60 a barrel.
It added that it expects charter rates to have bottomed out even in the absence of any upwards trajectory at this point as asset utilisation rates have begun to improve.
For 4Q2017, the results for the eight counters under AmInvestment Research's coverage improved with four companies exceeding expectations.
"Higher-than-expected margins from its Ghana-based FPSO drove Yinson
’s bottomline, Malaysia Marine and Heavy Engineering Holdings (MMHE) benefited from lumpy change orders and positive tax charge, Dialog Group
was supported by higher margin recognition from the Phase 2 Pengerang Deepwater Terminal project construction cycle and commencement of its 25%-owned regassification plant while UMW Oil and Gas (UMWOG) was supported by higher rig utilisation rates," it said.
"Three companies – MISC, Bumi Armada
and Petronas Gas – were within expectations while Sapura Energy
’s disappointing loss stemmed from low asset utilisation rates of its drilling and offshore construction divisions."
AmInvestment Research said the Opec production quotas initiated in the beginning of last year appears to have suppressed US oil inventories, which have fallen 21% from March 2017 to 423.5 million varrels.
This is despite an increase in US oil production to 10 million barrels, with expectations to reach 11 million varrels by the end of the year.
"As such, we have raised our 2018-2019 Brent crude oil projection to US$60/barrel-US$65/barrel from US$55/barrel-US$60/barrel vs. the EIA’s WTI crude oil prices at US$58/barrel for 2018."
The research firm added that contracts awards have declined 15% on year to RM7.6bil in 2017.
"As these Pan Malaysian umbrella scope of works are mainly determined on a call-up basis, we still expect Petronas to maintain a cautious approach to upstream exploration and development expenditures."
Its top picks remain companies with stable and recurring earnings such as Dialog Group and Yinson.
It maintained a "sell" call for Petronas Gas due to the Energy Commission’s upcoming announcement of the transportation tariff setting mechanism next month, which we expect to be value-eroding due to an expected lower targeted rate of return on asset values.