Oil & Gas - OVERWEIGHT - 26 June 2012

Despite volatile crude oil price movements and the uncertain global economy, we are still positive on Oil & Gas (O&G) due to; 1) a likely pick-up in contract flows in 3QCY12; 2) Petronas’ newly announced projects. Heading into 2H12, the key themes for the domestic sector will continue to be in line with the spirit of the four key thrusts outlined in the ETP for the sector, which are largely related to; 1) sustaining reserve replenishment; 2) enhancing Malaysia’s status as an oil field services hub. Maintain OVERWEIGHT on O&G with YINSON (OP; TP: RM2.68) as our  3Q12  TOP  PICK  given  its  position  as  a  proxy  to  the  burgeoning O&G market  in Vietnam. 

Crude oil prices slip on global uncertainty.  Crude oil prices have fallen since the beginning of May as the sentiment on the global economy took a turn for the worst. To date, Brent and WTI have dropped to USD99.6/bbl and USD84.1/bbl respectively (from USD123.1/bbl and USD103.0/bbl respectively in end-Mar). The outlook from international energy agencies are mixed for the sector, which  indicates that there is still much uncertainty when it comes to the short term trend of the crude oil price. We are cognisant of the risks of a weaker global economy and have reduced our average 2012 Brent and WTI crude oil price assumptions to USD114.4/bbl and USD96/bbl, respectively (from USD121.1/bbl and USD104/bbl previously). Our average 2013 WTI  crude oil price has also been lowered to USD113.2/bbl and USD95/bbl respectively (from USD 128.1/bbl and USD110/bbl previously).

Pick-up in domestic contracts and more project announcements from Petronas. In 2Q12, there was a general pick-up in contract awards, with the main winner being SapuraKencana Petroleum (“SKPETRO”, OP; TP: RM2.63) with a total contract haul of around RM2.0b (out of around RM2.6b awarded). Within the quarter, Petronas also; 1) unveiled the first floating liquefied natural gas (FLNG)  unit for commissioning by 2015; 2) kicked-off a tender for the second FLNG unit to develop the Rotan and Biris fields off Sarawak; 3) awarded the Kinabalu PSC to Talisman Energy. We take these as positive signs that domestic contracts flows are gaining traction and that Petronas will still be maintaining its capex plans. 

More to come?  We believe contract flows will not ebb in 2H2012 as awards in relation to headline projects like the North Malay Basin and  RAPID projects (which are expected to be commissioned from 2013-2015) have yet to be awarded. The marginal field awards (which seem to be delayed from the Apr-May timeline) will also form part of the contract awards in the latter part of the year with the eligible local beneficiaries being SKPETRO, Dialog and Bumi Armada for their scale, strong  financials and ‘top-of-class’ capabilities. Smaller players cannot be ruled out but consolidations are warranted to beef-up scales. This is especially in regard to the offshore local fabricators (which had been highlighted as a critical target exercise in the 2011 ETP annual report). In our view, such corporate exercises will likely involve Petronas’ Teluk Ramunia Yard (acquired from Sime Darby together with MMHE’s acquisition of the Pasir Gudang yard), Ramunia’s Pulau Indah yard and Boustead’s Penang yard.

Maintain OVERWEIGHT.  Our continued confidence in the sector is premised on the steady project news flows that we have seen from Petronas. Key themes underscoring Malaysia’s oil and gas play will be the four key thrusts outlined in the (ETP) which are 1) sustaining oil and gas production, 2) enhancing downstream growth, 3) making Malaysia the number one Asian hub for oil field services and 4) building a sustainable energy platform for growth. YINSON (OP; TP:RM2.68) is now our TOP PICK for its position as a proxy to the burgeoning oil and gas market  in  Vietnam.  Meanwhile,  we  have  OUTPERFORM  calls  on  Alam  Maritim  Resources  (OP; TP:RM1.14), Coastal Contracts (OP; TP:RM2.53), Dialog Group (OP, TP:RM3.09), Petronas Chemicals Group (OP; TP:RM7.46), Seremban  Engineering (OP; TP:RM0.55), Uzma (OP; TP:RM2.55) and Wah Seong Corporation (OP; TP:RM2.23), and UNDERPERFORM calls on KNM Group (UP; TP:RM0.73) and MMHE (UP; TP:RM4.65).  

Source: Kenanga