AmInvest Research retains overweight on oil and gas stocks

AmInvest Research continues to like Dialog Group and Serba Dinamik Holdings due to their resilient non-cyclical tank terminal and maintenance-based operations.

KUALA LUMPUR: AmInvestment Research is maintaining its overweight call on the oil and gas sector with eight buy calls and one hold following the release of their corporate results recently.

In its research note on Wednesday, it continues to like Dialog Group and Serba Dinamik Holdings due to their resilient non-cyclical tank terminal and maintenance-based operations.

It recommended Yinson for its strong earnings growth momentum from the full-year contributions of FPSO vessels Helang, off Sarawak, Abigail-Joseph in Nigeria and Anna Nery in Brazil together with multiple charter opportunities in Brazil and Africa.

“We also like Sapura Energy, which will complete its RM10bil debt restructuring package soon and position the formidable EPCIC group to secure fresh global orders.

“Meanwhile, Petronas Gas offers highly compelling dividend yields from its optimal capital structure strategy and resilient earnings base, ” it said.

On the just ended financial results, AmInvest Research said nine companies under its coverage were mixed as five were within its expectations, three above and only Hibiscus Petroleum underperformed due to an increase in non-cash provisions for amortisation and decommissioning charges.

Bumi Armada’s commendable performance stemmed from peak production from the floating production, storage and offloading (FPSO) vessel Armada Kraken, which has resolved its recurring technical problems in the North Sea.

As for Serba Dinamik, it posted an impressive 4QFY20 earnings surge largely from its Malaysian-based operations despite the conditional movement control order while Yinson benefited from lumpy one-off construction earnings from its FPSO Abigail-Joseph.

Even though Sapura Energy’s 9MFY21 earnings appeared to be above the research house and consensus’ loss expectations, its engineering and construction division’s surprisingly strong 9MFY21 EBITDA margins were boosted by lumpy contract adjustments and cost reversals, which could normalise in 4QFY21.

AmInvest Research said the sector’s core 4QFY20 net profit rose 35% on-quarter to RM2.4bil largely due to MISC’s one-time gain from a five-year charter extension from FPSO Espirito Santo, higher product prices for Petronas Chemicals and Yinson’s lumpy FPSO profit recognition.

This was also supported by Bumi Armada’s stronger FPSO performance and forex gains together with Serba Dinamik’s strong revenue growth.

However, 4QFY20 EBITDA margin slid 4 percentage points to 32% due to higher operating costs for MISC and Petronas Gas, together with lower construction margins from Sapura Energy.

Excluding Serba Dinamik’s huge civil and ICT jobs in the UAE, new contract awards in 2020 for Malaysian operators tumbled 42% YoY to RM6.6bil. However, including Serba’s lumpy UAE projects, the 2020 new orders instead rose 38% YoY to RM15.8bil.

New project rollouts were still sluggish in 4Q2020, as fresh jobs fell 32% YoY to only RM1.5bil.

“Nevertheless, we note that this was still better than the 3-year low of RM569mil in 1Q2020, which underpins our view that the worst of the Covid-19 impact is behind us amid prospects of stronger order flows in 2H2021, ” it pointed out.

As for Petronas, it said the national oil corporation is moving towards net-zero emission targets by 2050, and it aims to invest in more renewable energy projects.

For FY20, Petronas’ capex shrank 30% YoY to RM33.4bil from a 41% decrease in upstream and 52% contraction in downstream. Hence, Petronas has over-achieved its targeted capex reduction of 21% for FY20.

Upstream spending continued to be weak, accounting for 43% of FY20 group capex vs. 51% in the previous year.

Geographically, the spending was almost evenly distributed in Malaysia and overseas. However, FY20 operating expenditures declined by 12%, exactly as targeted by management earlier last year despite the lumpy year-end increase.

As for the outlook on oil price, AmInvest Research said even though Brent crude oil prices have risen to US$64/barrel currently versus its unchanged crude oil price forecast of US$50–US$55/barrel for 2021 and US$55– US$60/barrel for 2022, “we note that the price outlook remains precarious.

“This is in view of the 14% drop in US crude inventories to 463mil barrels currently from the all-time high of 541mil barrels in June last year which stemmed from the unusually cold US weather in February this year, disrupting Texan production together with the Saudi production cut of 1mil barrels/day.

“However, US shale production could rebound when the weather improves while the Opec+ quota may unravel given the brighter oil price environment amid weak global demand.

“For comparison, the EIA’s Short-Term Energy Outlook currently projects Brent oil price at US$53/barrel for 2021 and US$55/barrel for 2022, ” it said.

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