Monday, March 17, 2014

RHB: Overweight On Oil & Gas Sector

KUALA LUMPUR: RHB says oil & gas (O&G) sector’s fourth quarter financial year 2013 results were disappointing, as earnings saw more misses than hits due to lofty expectations.

"Most offshore  support  vessel (OSV) players booked  weak  performances  despite  the  multi-billion-ringgit  contracts awarded in current year 2013. We maintain our OVERWEIGHT call on the sector as we  expect  Petronas  to  ramp  up  spending.  Our  Top  Picks  are SapuraKencana Petroleum (SAKP), Dayang, Coastal Contracts and Wah Seong, said RHB in its note today.

According to RHB most  of  the  O&G  stocks under its coverage  booked disappointing results  in fourth quarter current year 2013,  with  more earnings missing rather than hitting estimates.  Excluding Yinson, only one out of the 15 stocks under our coverage outperformed estimates  in current year 2013,  while  six  were  in line.  

The  misses  were largely  due  to  our high expectations  that  most  of  the  companies  under  our  coverage  would benefit from Petronas’ planned MYR300 billion capex spending. Most of the OSV  players  disappointed  despite  the  multibillion contracts awarded by Petronas last year, as work orders from the company  had been slow.  That  said, most management teams  generally indicated that activities should pick up by second half of current year 2014.

The share price of some  small-cap companies  performed well last year on expectations that part of the 20 identified marginal fields would  be  awarded  to  them.  However,  a  delay  in  the  Refinery  and Petrochemicals  Integrated  Development  (RAPID)  project  by  Petronas prompted  a  selloff of RAPID-related stocks.  Most OSV  players reported disappointing results from lower fleet utilisation rates throughout current year 2013. 

Our  top  big-cap  pick  is  SAKP ,  in  view  of  the  potential  upside  to  its  current  share  price weakness,  due to  the uncertainty over its Shariah-compliant status.  The consolidation  of  Newfield’s  upstream  assets  may  prompt  us  to  raise SAKP’s fair value  by 41 sen. 

Meanwhile,  Dayang  Enterprise   and  Coastal  Contracts  are our mid-cap favourites,  thanks  to  their  long-term earnings visibility.  For  small-caps,  we prefer  Wah  Seong  Corp,  as the group  begins  to see  a strong recovery  in  its O&G segment and higher orderbook replenishment. 

Due  to  expectations  that  Petronas  would  award  more  risk-service contracts  (RSC)  in  FY13,  some  small-cap  stocks  saw  record  price  rallies  –  Scomi Energy Services and Uzma’s share prices soared by 224 per cent  and 334 per cent  respectively in financial year 2013.

SES was reported to be bidding  for  the  OphirRSC,  a  marginal  field  off  the  coast  of  Terengganu ,  with  its  Australian  partner  – Octanex   –  and  Petronas’  wholly-owned,  marginal  oilfield  expert, Vestigo Petroleum. Uzma was also tipped to win a RSC.

The  marginal  oilfield  expert.  Vestigo  was  set  up  in  mid-2013  and  is  part  of Petronas’  exploration  &  production  unit,  Petronas  Carigali  (Carigali).  It  is  largely involved  in  the  optimisation  of  small,  marginal  and  mature  fields,  unlocking  value through operational, technical and cost-effective methods. In short, Vestigo oversees the development  of  marginal fields,  while  Carigali focuses on developing larger and complex fields. 

Keith Collins  –  previously of Petrofac Malaysia  –  was appointed as Vestigo’s chief executive officer (CEO) in Oct 2013. He brought in more than 30 years of experience in management, drilling  and  well completion,  as well as  field development activities. Under his helm, we believe the Malaysian corporates – by teaming up with Vestigo –could  take  charge  of  marginal  field  developments  without  foreign  involvement.

Meanwhile, we would not be surprised that the first-generation RSC winners – SAKP, Dialog  Group  and  Petra  Energy  –  would  be taking the lead in such projects  with enough knowledge transfer from their respective foreign partners. 

Activities have  yet to  gain traction.  The OSV  and  floating production, storage & offloading (FPSO) segment recorded a mixed performance in fourth quarter. Of the eight stocks of  this  sub-segment,  only  COCO  outperformed  our  expectations  while  Dayang and Perdana  Petroleum  were in line with our fullyear forecasts.

The other OSV & FPSO players  disappointed, largely  due to  lower vessel utilisation rates. We understand that topside major maintenance and hook -up commissioning & construction (TMM & HuCC) as well as transport & installation (T&I) work orders from Petronas  have been slow. Some corporations  attributed this to the monsoon  season,  which  is  expected  to  be  over  by  May.  Hence,  we  expect  some OSV  players,  namely  Dayang,  Alam  Maritim  Resources  and PETR to see a pickup in second half 2014 earnings as offshore activities resume. 

We do not  expect  Petronas to dish out multi-billion-ringgit projects  again  this year. That  said,  we  do  not  discount  the  possibility  of  sub-contracts  indirectly  benefitting other  players  like  AMRB,  Perisai  Petroleum  Teknologi  and Bumi Armada, which failed to clinch any contract during the bidding process last year. 

The  investment  community  is  concerned  about  the economic  viability  of  Petronas’  RM60 billion  Refinery  &  Petrochemicals  Integrated Development  (RAPID)  project.  The  project’s  final  investment  decision  (FID)  was initially scheduled  to be announced in June 2013, but this has been delayed to March 2014.

The project also faces challenges in land acquisition and relocation. We believe the concerns are overdone and the project will receive the  go-ahead in the next one month, although the size of the project could be scaled down by 20-30 per cent. 

While  the  original  size  of  the  project  is  estimated  at RM60 billion,  we  think  a RM40 billion capex will be a more realistic target given  lukewarm demand from foreign investors. To  date, the project has signed up several names like Italy's Versalis SpA, Japan's Itochu, Bangkok-listed PTT Global Chemical and Germany's Evonik. Stocks  that  will  benefit  from  RAPID  are  Dialog,  KNM  Group   and Muhibbah Engineering. 

We expect M&A activities to heat up in the next 12 months as companies try to chase higher earnings. In our view, offshore vessel owners  should expand overseas or undertake M&As  to benefit from economies of scale and improve profitability. The local market is getting increasingly saturated with fewer reinvestment opportunities.



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