Rising maintenance demand in 2H seen for O&G sector
9 July 2019
Source: The Edge Financial Daily
Oil and gas sector Maintain neutral: Brent crude prices have averaged at US$66/barrel (bbl) (RM273.24) in the first half of 2019 (1H19) (versus 2018’s average of US$72/bbl) and we are maintaining our full-year 2019 average price assumption of US$68/bbl on the back of a slightly stronger 2H19. This is premised on the recently concluded decision by the Organization of the Petroleum Exporting Countries and its partners to extend its production cut agreement by another nine months till end of March next year.
However, we believe the upside could be still capped by resilient US production growth of +1.4 million bbl/day (bpd) in 2019 (Energy Information Administration’s 2019 average forecast is at 12.4 million bpd) and lingering uncertainty arising from the US-China trade war putting pressure to the overall demand growth.
We are still positive about upstream maintenance players underpinned by continuous work orders awarded by the clients. These players are likely to register stronger earnings both quarter-on-quarter (q-o-q) and year-on-year (y-o-y) in the second quarter of 2019 (2Q19).
Moreover, Petronas is likely to award its integrated hook-up and commissioning (I-HUC) (restructured from existing HUC and topside major maintenance contract) tender earliest by 3Q19. The total tender could be worth up to RM4 billion and potential beneficiaries are Dayang Enterprise Holdings Bhd, Carimin Petroleum Bhd and Petra Energy Bhd.
On the other hand, according to Petronas Activity Outlook 2019-2021, plant turnaround activities are also expected to stay robust in the near medium term. Following the award of five-year agreement for integrated turnaround main mechanical and maintenance mechanical static to 17 local contracts, we expect contract flow for other master service agreement for diff erent maintenance work scope, which is maintenance of rotating equipment.
On the domestic front, Petronas’ capital expenditure (capex) spending had a slow start in 1Q19 (-59% q-o-q; -31% y-o-y), accounting only 17% of Petronas targeted full-year capex estimate of RM50 billion (+7% y-o-y). While Brent prices are still hovering above US$60/bbl level, which is in line with Petronas crude assumption of US$66/ bbl, we reckon that Petronas may not revise its budget. Therefore, we expect overall capex to ramp up in the next few quarters.
As of end-June, Moody’s has downgraded Petronas’ domestic issuer and foreign currency senior unsecured ratings to A2 from A1 but upgraded the rating outlook to stable from negative. We are not overly concerned about the potential hike in Petronas’ financing cost subsequent to the credit rating downgrade as Petronas is still able to stomach additional credit cost. However, if the Malaysian government continues to demand lumpy one-off dividends, Petronas would have to cap its spending which will eventually jeopardise its future growth.
As we believe maintenance players are likely to gain traction within the oil and gas (O&G) sector, we increased our valuation multiple for Dialog Group Bhd and Dayang by one to two times price-earnings ratio in our respective sum-of-parts valuation. This is also backed by solid earnings trajectory coupled with strong track records.
Post adjustment, Dayang’s cum/ ex-TP is increased to RM1.49/RM1.43 assuming higher multiple of 12 times (from 10 times) for its topside maintenance services segment while Dialog’s TP is upped to RM3.87 (from RM3.80) assuming higher multiple of 21 times (from 20 times) for its core businesses. Keep “neutral” view on the sector with gradual improvement within the upstream space. — Hong Leong Investment Bank Research, July 8