4QCY12 was marked by the absence of any marginal awards, a
tepid 3Q12 results season performance and slower local contract flows. 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. Contracts that
could spill over from late-2012 include those relating to OSV, the North
Malay Basin project and the Pan Malaysia hook-up and commissioning project. We
expect the OSV and drilling segments to take off as well. 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.
Relatively slow going
in 2012. Delays in marginal fields rollout
In contrast to our view in our earlier 4QCY12 strategy outlook, no
marginal fields were awarded after the
KBM cluster, which is currently being developed by Coastal Energy and
local partner Petra Energy Bhd
(“PENERGY”, NOT RATED). To re-cap, there was talk of more marginal fields post
the Hari Raya celebration (in Oct 2012), especially that for Tembikai and
Cenang fields with the frontrunners purportedly being Scomi Group Bhd (“SCOMI”,
NOT RATED) and its partner, Cue Energy. However, to date, such awards remain a
no-show.
A tepid 3Q12 results
season. The oil and gas sector’s
3QCY12 result season performance was lukewarm as although most of the stocks
reported results that came in within our expectations, the few disappointments
actually involved the larger cap (~RM1.0b and above) stocks like Wah Seong Corp
Bhd (“WASEONG”, MP; TP: RM1.78), Bumi Armada Bhd (“ARMADA”, NOT RATED), Malaysia
Marine Heavy Engineering Holdings Bhd (“MHB, UP; TP: RM4.02), Petronas
Chemicals Group Bhd (“PCHEM”, OP; TP: RM6.38)
and Petronas Gas Bhd (“PETGAS”, MP; TP:RM19.86). This brought the
overall investor sentiment to a low for the sector.
Softer local contract
flows in 4QCY12. The contracts to local parties in 4QCY12 of RM1.5b were
slightly lower than that of the c.RM1.7b awarded in 3QCY12. However, the awards
to foreign players, (Linde to build a mid-scale LNG plant and, Hereema and
Technip for two offshore installation contracts) brought the overall contract
awards sum to RM2.8b. Crude oil prices
might stay range-bound in 2013 but the O&G sector prospects is expected to
improve due to the domestic needs.
Excess crude oil
supply will prevent significant price rises in 2013-14. Our Economic team
foresees the average 2013-2014 Brent crude oil price to trend at
USD110.6/bblUSD117.3/bbl and the average 2013-2014 WTI crude oil price to trend
at USD97.5/bblUSD101.7/bbl. The 2013 Brent price is lower compared to our
average 2012 crude oil price expectation of US$111.5/bbl due to the still weak
economic condition of the EU while the WTI price is higher (versus the average
estimated 2012 crude oil price of USD94.1/bbl)
due to a more optimistic outlook on US productivity in the year ahead. We
highlight that both the Brent and the WTI prices are on an uptrend as we expect
a general improvement in 2014 from a better global economy then.
Continuous effort by
Petronas. Petronas’ 3Q12 net profit
declined 2.6% QoQ and 21.8% YoY due mainly to a lower sales volume of crude oil
and condensates. The main reasons for this are due to its natural field
depletion, weaker reservoir performance and operational challenges, including
geopolitical challenges in some of Petronas’ international operations. Given
such challenges, we see this as a sign that the national oil company will have
to continue its production enhancement efforts, which are the main driver of contract awards and the Economic
Transformation Program (ETP) endeavours.
Source: Kenanga
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