Strong surge in contract flows seen for O&G sector


19 Jun 2019

Source: The Edge Financial Daily

 

Oil and gas sector

Downgrade to neutral: With heightened uncertainty over global demand and a good run-up in oil and gas (O&G) stock prices in the first half of 2019 (1H19), we are downgrading the sector to “neutral” (from “overweight”) as the risk-reward profile is skewed to the downside.

While better corporate earnings delivery and contract flows are among the key items to look out for in 2H19, these are likely already priced in. We believe the upcoming Opec meeting will see an extended production cut, although at a smaller quantum in view of the rebalanced oil market.

Concerns over an escalation of a trade war saw global oil prices taking a beating of late, with Brent crude oil prices now trading at the lower end of US$60 (RM250.80) per barrel. While there is market expectation of a compromise between the US and China, the after-effects have already been felt from the earlier rounds of tariff s. With economic demand at risk more than ever, we “downgrade” our 2019 Brent crude oil price forecast to US$65 to US$70 per barrel (from US$70 to US$75) and 2020 forecast to US$65 to US$70 per barrel (from US$70).

1Q19 corporate earnings were generally viewed as “positive” compared with the previous quarter with Petronas Chemicals Group Bhd (PChem) the only casualty from the prolonged trade war affected by the lower product average selling prices. Sentiment on the sector was dragged down following the disappointing, but not unexpected weak results from off shore maintenance players due to the monsoon season.

Activity level has seen a pickup from April 2019, particularly from the maintenance and decommissioning space, also benefitting the off shore support vessel players. We expect a strong surge in contract flows as we await the award of hookup commissioning packages (in the range of RM4 billion) from Petronas Nasional Bhd, and also quicker capital expenditure spending ramp-up as Petronas’ fi rst quarter of fi nancial year 2019’s (1QFY19) actual spending was seen to be on the low side versus its RM50 billion full-year target.

As for stocks, we continue to like PChem as our big-cap pick on additional refi nery and petrochemical integrated development capacity likely contributing to earnings in FY20 and a better product price outlook. Serba Dinamik Holdings Bhd and Velesto Energy Bhd are backed by strong earnings growth prospects and a visible earnings turnaround for the latter, which makes it a good trading proposition. We also like Kelington Group Bhd for the contribution of its new liquid carbon dioxide plant. — Affin Hwang Capital, June 18