Multiple contract awards signal renewed optimism in O&G sector

The recent developments on Covid-19 vaccines give hope for a better outlook ahead, notes a research firm


THE energy market is at an inflexion point with the rollout of vaccines to combat the Covid-19 pandemic, and in the expectations of economic growth as business and people get back to work.

Crude oil prices are in the US$50 (RM203) a barrel territory now, fuelled by the view that demand is on track to accelerate.

“With gradual recovery in demand on the back of higher inventory drawdowns as lockdowns eased, coupled with the limits on oil production by OPEC+ members, we foresee oil prices stabilising at current levels.

“The recent positive developments on Covid-19 vaccines give hope for a better outlook ahead. This suggests the worst is most likely finally over for the sector,” said Public Investment Bank Bhd (PublicInvest) in a research note yesterday.

The bank has an ‘Overweight’ call on the sector due to an expected positive performance from local oil and gas (O&G) companies.

The investment bank increased its target price on Dayang Enterprise Holdings Bhd to RM1.66 underpinned by the group’s outstanding orderbook at RM3.6 billion.

“While no contracts were terminated during the recent ‘crisis’, most work orders that are largely based on call-outs would likely have been deferred to 2021 given the uncertain and volatile oil prices. “The group was recently awarded a contract in August by Sarawak Shell Bhd and Sabah Shell Petroleum Co Ltd for the topside major maintenance with work order starting July to end-2020, suggesting that works are still continuing albeit at a slower pace,” said PublicInvest analyst Nurzulaikha Azali.

She added that Dayang Enterprise’s financial year 2020 (FY20) earnings have been affected by Covid-19, with the enforcement of movement restrictions leading to a significant disruption to its operations.

“The group is poised for strong earnings recovery in FY21 on the back of a solid orderbook in hand. This is in tandem with progressive recovery in sector dynamics for 2021,” said Nurzulaikha.

Uzma Bhd is another O&G company that has proven to be one of the very few brownfield service providers to actively secure contracts amid a shaky operating environment.

The company recently clinched its eighth contract for the year, demonstrating its ability to replenish its orderbook consistently while ensuring its earnings visibility in the coming years.

“Uzma recently secured a long-term contract with Petronas Carigali Sdn Bhd, representing its third contract win for FY21 and eighth in total for calendar year 2020.

“This comes after the group was awarded an extension contract for coiled tubing services for a duration of two years worth RM200 million,” said Nurzulaikha.

Uzma’s orderbook is now estimated at RM1.6 billion, translating to 2.9 times of FY20 revenue. Uzma is still actively bidding for numerous projects with a combined value of RM2.5 billion.

“We foresee the flow of contracts to continue into 2021, in tandem with an improvement in industry dynamics.” she added.

Uzma reported earnings turn-around in the latest first quarter of financial year 2021 (1Q21) results with core net profit of RM6.6 million against core net loss of RM22.1 million in 4Q20.

“Profit margins also saw improvement, attributed to the group’s initiative in implementing cost reduction measures during the current operating climate,” Nurzulaikha added.

On Monday, Yinson Holdings Bhd’s earnings doubled to RM100.73 million in 3Q ended Oct 31, compared to RM53.97 million recorded a year ago on the back of higher contribution from its engineering, procurement, construction, installation and commissioning (EPCIC) business activities and lower loss on foreign exchange of RM12.7 million.

AmInvestment Bank Bhd senior VP Alex Gog said Yinson’s profit exceeded expectation largely due to EPCIC phase of the group’s floating, production storage and offloading (FPSO) vessels from the Nigeria-based FPSO Abigail-Joseph and Petróleo Brasileiro SA’s FPSO Anna Nery.

The research bank raised Yinson’s FY21F-FY23F earnings by 7%-41%.

Another company that posted positive earnings is Sapura Energy Bhd that recorded a net profit of RM17.2 million in 3Q21.

“We upgrade our recommendation to ‘Buy’ from ‘Sell’ on Sapura Energy with a higher fair value of 29 sen a share (from five sen a share), pegged now to a 50% discount to the group’s FY21F book value versus 0.2 time to net tangible asset previously.

“This stems from the group being on the verge of refinancing its RM10 billion debt for another seven years by the end of January next year without any substantive interest cost increases, which we believe was assisted by Sapura Energy’s largest government-linked companies -backed shareholder,” said Gog.

Additionally, Sapura Energy secured an additional working capital of RM1.2 billion for its ongoing and prospective projects.

“Even though we acknowledge the possibility of losses from the normalisation of contract provisions and likely asset impairments in 4Q21, we view the group’s down- side risks as cushioned by the steep 78% book value discount currently,” added Gog.

Recently Petroliam Nasional Bhd (Petronas), in its latest quarterly earnings report, revealed higher capital expenditure (capex) by 22% quarter-on-quarter (QoQ) to RM7.7 billion following the 25.6% QoQ slippage of RM6.3 billion in 2Q.

This brings capex for the nine-month period of 2020 (9M20) to RM22.5 billion, though still down from RM28.9 billion in 9M19, further reflecting that recovery in the sector is in place.