Oil & Gas - QCY12 Results Round-Up – Neutral to Mildly Disappointing

The 3QCY12 results season was within our expectations, with 7 out of the 12 stocks under our coverage coming in generally in line with our expectations. However, from a consensus standpoint, there were more misses (5 out of 12 stocks missed 9M expectations). Major downgrades by us and the market were MHB and WASEONG as both companies posted significant deterioration on their sequential earnings. Despite the mildly disappointing quarter, we remain OVERWEIGHT on the sector as we believe that the many long-delayed projects are poised for  take- off in 2013, potentially making it an exciting year for the sector. However, we highlight that there is a significant risk to our call as if these delays persist beyond 1H13, the earnings of O&G companies could be held back. SKPETRO (OP; TP: RM3.42) remains as our TOP PICK.

3Q12 results are largely within expectations.  The 3Q12 results season was largely within our expectations as 7 out of the 12 stocks under coverage met the 9M net profit expectations. From a consensus standpoint, there were more misses (5 out of 12), but Gas Malaysia Bhd (“GASMSIA”, OP; TP: RM2.94) and KNM Group Bhd (“KNM”, MP; TP: RM0.53) managed to spring surprises with better-than-expected results. Disappointments involved the likes of the mid to large cap oil and gas stocks: 1)  Wah Seong Corp Bhd (“WASEONG”, MP; TP: RM1.78) was hammered by losses in both its oil and gas and industrial and trading services; 2)Petronas Chemicals Group Bhd (“PCHEM”, OP; TP: RM6.38) was hit by plant maintenance; 3) Malaysia Marine Heavy Engineering Holdings Bhd (“MHB”, UP; TP: RM4.02)  missed forecasts on significant provisions for variation orders in regards to its FPSO Cendor project; 4) Petronas Gas Bhd (“PETGAS”, OP; TP: RM19.86),  while satisfactory by our standards, missed the consensus forecasts due a lower-than-expected gas processed; 5)  Bumi Armada Bhd (“ARMADA”, NOT RATED) due to its lower-than-expected FPSO wins for the year. 

MHB and WASEONG faced major downgrades. We note that MHB, WASEONG and ARMADA fared the worst out of the oil and gas stocks as they accounted for c.40-50% of both ours and the consensus estimates. However, only MHB and WASEONG saw major downgrades by the industry given their lack of near-term catalysts. ARMADA only saw a marginal 7% FY12 net profit adjustment as the market continues to be confident on its ability to win a project within the year. For MHB, write-backs, if any, for the FPSO Cendor project is only expected by end-2013 (targeted completion is by 3QFY12). For WASEONG, its headline projects (Turkmenistan and North Malay Basin pipe-coating project) will only kick-start in 2013. 

Better 4Q12?  We do not expect significant upsides for the stocks under our coverage for the next 4Q12 results season given that it is typically a slower quarter for offshore asset owners due to the monsoon season. Having said that, companies like ARMADA could surprise investors as it will account for its new FPSO projects on a straight-line basis once it secures a contract. Meanwhile, due to the challenging demand outlook on the petrochemical products, we are downgrading our target price for PCHEM to RM6.38 (from RM6.86) as we cut its targeted CY13 PER to 13.5x (12-month average) from 14.5x (recent  high in Oct 2011) previously. Our OUTPERFORM call remains unchanged.

Looking to a better 2013. Despite the mildly unexciting quarter, we opt to remain positive on the sector as we believe that the many long-delayed projects are poised for take- off in 2013, potentially making it an exciting year for the sector. Petronas’ 3Q12 net profit has declined on a QoQ (-2.6%) and YoY (-21.8%) basis, with one of the main reasons being lower sales volume of crude oil and condensates due to natural field depletion, reservoir performance and operational challenges including geopolitical challenges in some of its international operations. We see this as a clear sign that the national oil company will have to continue its production enhancement efforts, which mean that contracts will still have to be rolled out. As such, we are maintaining our OVERWEIGHT call for the sector.

Risks. 1) Contract award delays persisting beyond 1H13, leading to weaker earnings and prospects for the oil and gas companies; 2) a downturn in global economy, which would result in crude oil prices falling and investment plans shelved.

Source: Kenanga