Oil & Gas - Still Confident On Potential Contract Award

We foresee 4QCY12 to be largely dominated by marginal field awards, with 2013 seeing most of the contract for the headline oil and gas projects being awarded. Notwithstanding the potential temporary share price weaknesses for the sector if a similar scenario (i.e. historical share price movements during a GE year) pans out for the upcoming General Elections, we have a longer term bullish call on the sector as domestic reserve replenishment concerns will continue to remain on the forefront for Petronas. This would point continuous aggressive spending by Petronas going ahead. As such, we are maintaining our OVERWEIGHT rating on the sector with SapuraKencana (OP; TP: RM2.79) remaining as our TOP PICK for its significant scale and global reach that makes it a favourite for contract tenders. 

The past: An unexciting quarter.  The oil and gas segment turned in an unsurprising performance during the 2QCY12 results season with most (7 out of 9) of the companies under our coverage coming in largely within our expectations with their results. The contract awards trend has been lacklustre in the past three months  (3QCY12) in contrast to 2QCY12, where large contracts like the Integrated T&I Offshore Facilities worth RM1.0b was awarded to SapuraKencana’s subsidiary. We also note that there have yet to be any marginal field awards since Thai-base Coastal Energy won the Kapal, Banang and Meranti (KBM) cluster in July-12. Given the uninspiring contract flows and relatively unsurprising results performance in the 2QCY12 results season, the share price performance of local oil and gas stocks have largely been in line or underperformed the FBMKLCI in the current quarter.

The present: 4Q12 outlook.  The last quarter of the year will largely be dominated by marginal field awards as most of the headline projects are likely to only be awarded in 2013. In the near term, unsurprising notables like SapuraKencana, Dialog (OP; TP: RM2.79) and Bumi Armada (NOT RATED) are our pick of likely candidates for the upcoming marginal fields. Although note that there are also smaller players in the running as well, such as Petra Energy (NOT RATED), Scomi Group (NOT RATED) and Daya Materials (NOT RATED). Uzma (OP; TP: RM2.55) has mentioned that it is also bidding for a marginal field.

The future: positioning for 2013. Despite having been in the news since 1H of 2012, we gather from the market that there is a fair bit of domestic projects, which will be awarded in 2013. Fabrication projects would include the likes of Dulang, Samarang and Bokor. The first CEOR project awarded will likely be the Angsi project. The Belud FPSO has yet to see a commercial bid emerging, although we expect it to be the next domestic floating project in the near term. Meanwhile, we understand that the candidates for the RM7b-RM10b Pan Malaysia hook-up and commissioning project could see their contract awards in 1QCY13.

Risks. Historically, oil & gas stocks saw share price weaknesses before and after the General Elections. Should the same trend repeat itself for  the forthcoming 13^th General Election, we believe it actually presents a good opportunity for investors to accumulate oil and gas stocks as we expect 2013 to be a vibrant year for the sector. Meanwhile, another risk is that delays in contract rollouts could tank investor sentiment for these stocks. However, we believe that Petronas’ acknowledgement of the dwindling domestic production in its latest results review is a signal to investors that capex spending for new fields and field rejuvenation are urgently needed. 

Maintain OVERWEIGHT.  Our continued confidence in the sector is premised on the steady project news flows that we expect to see. Petronas  is likely to move ahead with the capex spend given that domestic reserve replenishment remains one of its main concerns. SapuraKencana is still our Top Pick for its significant scale, global reach and track record that makes it a favourite during contract bids. Underpinning our bullish sector call, we also have OUTPERFORM calls on Yinson Holdings (OP; TP: RM2.68), Alam Maritim (OP; TP: RM1.14), Coastal Contracts (OP; TP: RM2.53), Dialog, Gas Malaysia (OP; TP: RM2.94), Petronas Chemicals (OP; TP: RM7.46), Seremban Engineering (OP; TP: RM0.59), Uzma and Wah Seong (OP; TP: RM2.23).

Source: Kenanga