Upstream activities remain lacklustre

PETALING JAYA: There may still be some downside risks for oil and gas (O&G) companies in the second half of the year despite some of the companies having guided for a recovery in the third quarter.

UOB Kay Hian Research (UOBKH) said in its report that its channel checks suggest local upstream activities continued to be lacklustre and noted that earnings could be biased to the downside in the third quarter.

“The active local rig count in the third quarter appears to be similar or slightly worse from the previous quarter. And deferrals of some non-essential works have been intensified, likely to 2021, in view of Petronas’ ongoing cost cuts, ” UOBKH said.

The research house said Petronas has been slow to cut costs as it continues to face multiple challenges despite having an ample cash buffer of RM168bil.

“Hence, contract deferrals remain as a key impact to the earnings outlook for the sector, ” it said.

It maintained its rating for the O&G sector at “market weight”.

Commenting on oil prices, UOBKH said that it might have run ahead of fundamentals and may be out of touch with reality.

“Continuous news flow 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 said.

“The Opec+ coming decision at end-November whether to extend or deepen the current output cuts, coupled with ongoing crude stock draws, is expected to be positive for oil prices, ” UOBKH added.

It said that these factors may result in oil prices running ahead of consensus expectations of US$47 per barrel and US$50 per barrel in the first half and second half of 2021 respectively.

UOB Global Economics & Markets Research and UOBKH’s said its base case oil price assumptions are more conservative at US$40 per barrel.

“We still advise against purely investing based on oil price momentum, and avoid stocks that are dependent on Petronas’ local contracts. However, despite prevalent earnings risks, we have some trading ideas, ” it said.

UOBKH noted that some bottomed-out stocks offer trading opportunities, for example, Malaysia Marine and Heavy Engineering Holdings Bhd on the revival of project bids like the Limbayong.

For large caps, it said it preferred Serba Dinamik Holdings Bhd over Dialog Group Bhd as the best proxy for maintenance works.

“For Dialog, we advise a wait-and-see approach, given that Vopak recently disclosed a negative statement on the Pengerang storage assets’ earnings volatility, ” UOBKH said.

It also upgraded Velesto Energy Bhd to “hold” with an unchanged target price of 12 sen noting that valuation has adequately priced in the falling utilisation in the second half of 2020.

“We expect the industry rig utilisation may be nearing a bottom, assuming Petronas will replenish the rigs with short-term contracts in a stable oil price environment at around US$40 per barrel, ” UOBKH said.

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