Earnings downside risk remains for oil and gas stocks


“We take the view that Petronas has been slow to cut costs as it continues to face multiple challenges despite having an ample cash buffer of RM168bil (helped by the recent US$6bil bond proceeds). Hence, contract deferrals remain as a key impact to the earnings outlook for the sector, ” it said.

KUALA LUMPUR: Earnings downside risk remains prevalent for oil and gas stocks due to contract deferrals, according to UOB Kay Hian Malaysia Research’s channel checks.

In its report on Thursday, it pointed out Petronas has benchmarked itself to an oil price of US$40/bbl, which is also its sector assumption.

“Nevertheless, oil market headlines may be increasingly bullish, led by vaccine progress and Opec+ policies, ” it said as it retained its market weight for the sector.

However, the research house sees trading opportunities. Fundamentally, it likes Serba Dinamik as the best proxy to recurring maintenance.

To recap, UOB Kay Hian Research said oil prices may run ahead of fundamentals. Continuous newsflow of vaccine developments is supporting themes of border reopening and easing lockdowns, theoretically supporting an oil demand recovery, though this is weighed down by new waves of Covid-19 infections.

It also said the decision by Opec+ in end-November whether to extend or deepen the current output cuts, coupled with ongoing crude stock draws are expected to be positive for oil prices.

These factors may result in oil prices running ahead of consensus expectations of US$47/bbl and US$50/bbl for 1H21 and 2H21 respectively.

To note, EIA just reduced its 2021 forecast to US$46.6/bbl. UOB Global Economics & Markets Research and the research house’s base case oil price assumptions are more conservative at US$40/bbl.

“2H20 sector earnings may still contain downside risk. Despite some companies guiding for a quarter-on-quarter (QoQ) recovery in 3Q20, our channel checks suggest local upstream activities continued to be lacklustre, hence, 3Q20 sector earnings still have downside risk, ” it said.

First, the active local rig count in 3Q20 appears to be similar or slightly worse QoQ.

Second, deferrals of some non-essential works have been intensified, likely to 2021, in view of Petronas’ ongoing cost cuts.

“We take the view that Petronas has been slow to cut costs as it continues to face multiple challenges despite having an ample cash buffer of RM168bil (helped by the recent US$6bil bond proceeds). Hence, contract deferrals remain as a key impact to the earnings outlook for the sector, ” it said.

UOB Kay Hian Research retained its market weight with upside trading bias with Serba Dinamik as its top pick.

“We continue to base our sector valuations on US$40/bbl oil price which factors in a recovery in oil demand. We still advise against purely investing based on oil price momentum, and avoid stocks that are dependent on Petronas’ local contracts.

“Some bottomed-out stocks offer trading opportunities, for example, MMHE on the revival of project bids like Limbayong.

For large caps, we prefer Serba Dinamik over Dialog as the best proxy for maintenance works. For the latter, we advise a wait-and-see approach, given that Vopak recently disclosed a negative statement on the Pengerang storage assets’ earnings volatility.

“Upgrade Velesto Energy to Hold with an unchanged target price of 12 sen (Entry: 11 sen). Valuation has adequately priced in the falling utilisation in 2H20 although we expect the industry rig utilisation may be nearing a bottom, assuming Petronas will replenish the rigs with short term contracts in a stable more than US$40/bbl oil price environment.

“For MISC and Uzma, we may review our recommendations depending on their upcoming results, ” it said.

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