O&G sector contract awards help overcome current sell-off

Order flow prospects remain bright at this stage with rising asset utilisation globally which supports service providers’ improving earnings, says analyst


The EIA’s short-term energy outlook is projecting oil prices at US$61 per barrel for 2020 and US$67 per barrel for 2021 – pic by MUHD AMIN NAHARUL

THE bearish fundamentals of the energy market favour oil and gas (O&G) sector companies with earnings visibility amid the spread of Covid-19 worldwide.

Analysts believe any upside to the outlook for the sector will be driven by fresh contract awards over the year.

AmInvestment Bank Bhd in a sector update yesterday said Malaysia’s 2019 contract awards slid 6% year-on-year (YoY) to lower than expected RM11.5 billion, following a lull in last year’s first quarter (1Q19) and a slower pace in 4Q19, which registered declines of 35% quarter-on-quarter and 46% YoY.

“We view this as the remaining fallout from the 2015–2017 award cycle dislocation,” it said.

Over the medium to longer term, the firm expects offshore projects in Brazil, Mexico, the Middle East and West Africa to gain traction with Sapura Energy Bhd and Malaysia Marine and Heavy Engineering Holdings Bhd bidding for Saudi Arabian Oil Co’s long-term agreement programme.

AmInvestment said this allows the two companies to bid for the kingdom’s massive offshore projects worth up to US$150 billion (RM626 billion) over the next decade.

“Westwood Global Energy Group is projecting global drilling and well services expenditure to grow 19% to US$1.9 trillion for 2019-2023 from 2014-2018,” it added.

AmInvestment noted while the impact of the Wuhan coronavirus outbreak is still uncertain at this stage, Brent crude oil prices have fallen almost 10% since the beginning of the year to just above US$52 per barrel currently.

“This signals potential dampening of global oil demand as US oil inventories have risen by 3% year-to-date to 443 million barrels.

“We maintain our 2020-2021 crude oil forecast of US$60-US$65 per barrel for now with OPEC and its partners looking at raising their production quota reduction of 2.1 million barrels this year, with the Joint Technical Committee of the OPEC+ group recommending additional cuts of at least 600,000 barrels per day,” the investment bank stated.

The US Energy Information Administration’s (EIA) short-term energy outlook is projecting oil prices at US$61 per barrel for 2020 and US$67 per barrel for 2021, it added.

AmInvestment maintains an ‘Overweight’ call on the O&G sector as order flow prospects remain bright at this stage with rising asset utilisation globally which supports service providers’ improving earnings.

“Our base-case scenario assumes that the Covid-19 pandemic will not have a prolonged impact on crude oil prices and global demand,” it said, adding that the firm prefers stocks with recurring income profiles.

It has a ‘Buy’ call on Sapura Energy and Velesto Energy Bhd, but its top picks are companies with stable and recurring earnings such as Serba Dinamik Holdings Bhd and Dialog Group Bhd.

“We like the recurring income business model of Dialog and Serba Dinamik which are involved in operation and maintenance services, while Dialog’s earnings visibility is further secured by the Pengerang Deepwater Terminal project with its enlarged buffer zone,” it said.

Kenanga Investment Bank Bhd in a note on Monday said on the back of ongoing geopolitical uncertainties, prolonged trade tensions and the outbreak of Covid-19, Brent crude prices have taken a tumble and hit a low of US$50 per barrel, as investors are expecting a prolonged period of oversupply as demand for oil continues to be disrupted.

The OPEC+ coalition is pressured to extend and deepen existing output cuts when it meets in Vienna the next two days to support prices for the time being.

“That said, Petroliam Nasional Bhd (Petronas) has taken a bearish stance on the outlook of the O&G sector, warning it may further impact its financial performance.

“As such, we believe cost optimisation will be given increased importance, which may pile added margins pressure on local-centric equipment and services providers, although hopefully, this could be partially mitigated by the sustained level of job flows, as guided in Petronas’ activity outlook,” it said.

The firm has maintained its ‘Neutral’ call on the sector, given all the uncertainties.

Its top picks include Yinson Holdings Bhd and Serba Dinamik given their defensiveness and earnings growth potential.

MISC Bhd also offers consistent dividends and status as a blue-chip counter, it said.

An analyst at another local brokerage sees compelling valuations to go long on the sector due to the selldown.

“Everything looks cheap, but questions remain on where oil prices go from here. The coronavirus seems to have just gained traction outside of China like in Italy and Australia,” he told The Malaysian Reserve yesterday.

With respect to Petronas’ results recently, the analyst said the national oil company’s performance was “okay” and based on its president’s comments, capital expenditure (capex) for last year was about RM47.8 billion, below its target of about RM50 billion.

“This year, he promised about RM50 billion and 10% greater allocation towards domestic capex. So, about RM28 billion for the local domestic players. If anything, the earnings outlook and the momentum of the financial year in 2019 (FY19) should follow through in FY20 for the O&G sector,” he said.

The analyst’s current top pick for the sector is Velesto Energy due to its contracts in hand and upcoming bids.

“They got renewals for four rigs coming up with Petronas, sometime before mid-year. So, in terms of earnings visibility, I think they have the best in the market.

“For all the other service providers, apart from those with long-term time charters and contracts, the contracts are awarded on an ad-hoc basis. So, if Petronas decided to delay in capex, then, their earnings and revenues will also be hampered too,” he said.

The selldown in Sapura Energy and Velesto Energy shares on Monday, he said, was due to domestic political situation and parallels the Bursa Malaysia’s performance in general.

“The selling is a bit misguided, in the sense that contracts for Velesto Energy have already been secured, three of seven rigs have been rerated from multi-tier low to higher rigs rates already. And they got four more coming in mid-year,” he explained.

He added that when Petronas decides on its capex, it takes a two-three-year outlook. “Hence, I don’t think it will affect Velesto Energy much,” he said.

Sapura Energy and Velesto Energy closed half a sen lower at 16.5 sen and 28 sen respectively yesterday valuing them at RM2.72 billion and RM2.3 billion each.