O&G: Tough times persist but more contracts expected in 2H

Alow number of outperformers in the eyes of Kenanga Investment Bank Bhd (kenanga Research) for 2Q17 led it to peg a dull outlok for oil and gas (O&G).

“In the recently concluded 2QCY17 result season, we saw lower number of outperformers, at only four companies out of nine in the previous quarter.

“Note that these four counters -- namely Coastal Contracts Bhd, Dialog Group Bhd, Pantech Group Holdings Bhd and Yinson Holdings Bhd -- had registered positive earnings surprises for at least the consecutive two quarters.”

On the flipside, Kenanga Research said the disappointment ratio stayed flattish at 27 per cent in 2Q17, whereby within the upstream space, these disappointments largely came from offshore services players such as Malaysia Marine and Heavy Engineering Bhd, Uzma Bhd, Wah Seong Corporation Bhd, and Dayang Enterprise Holdings Bhd, dragged by lower- thanexpected work orders and delay of contract award by oil majors.

Following that, we cut our two-year forward earnings by 24 per cent/3 per cent given our less optimistic view on 2H17’s earnings outlook.

Challenging operating environment

This comes on the back of challenging operating environments as examplified in 2Q17. Despite recording 16 per cent quarterly growth due to seasonality, the aggregate revenue from upstream space deteriorated 11 per cent y- o- y across most sub-segments.

Asset- heavy players such as drillers, Kenanga Research said, managed to narrow their operating losses helped by higher rig utilisation resulting from a higher number of short-term contracts and lower depreciation post impairment while offshore support vessel (OSV) charterers widened their operating losses dragged by poor vessel utilisation with no reprieve in charter rates despite spot charter space still active.

“What caught us by surprise was the aggregate earnings for oilfield services players falling 67 per cent q-o-q even though the aggregate revenue improved by 16 per cent q-o-q,” it said.

“On a closer look, the poorer performance is marred by Barakah Offshore Petroleum Bhd which sank into massive operating losses of RM77 million in 2Q17 as a result of project cost overrun.

“We understand that this is because the oil major has become more stringent in terms of claiming variation orders suggesting that service providers/ contractors are exposed to higher operating risk going forward.”

Better contract flow in 2H17

Within the local scene, the recent portfolio reshuffling by Petronas may not be seen benefiting the local upstream space as not much attention is given as far as the local services players are concerned.

This could be due to the pullback in capital expenditure and operating expenditure spending that was disrupted by the volatility of oil prices in 2Q17, further delaying some of the contracts awards, which were initially anticipated in 2Q17.

“Based on our channel checks, the estimated RM4 to RM6 billion 5-year maintenance, construction and modification (MCM) tender has been extended to October,” Kenanga Research said. “Besides this, OSV players are also expecting the integrated logistic contract (ILC) award by end of the year.

“Recall that the tender entails 25 packages with variations of firm and call-out contracts with the option of 3+2 year tenure and 5+2 year tenure. The contract is potentially valued up to RM4.0b and expected to commence next year.

“We believe Dayang and Petra Energy Bhd stand good chance to win MCM contracts while the listed OSV players such as Alam Maritim Bhd and Icon Offshore Bhd are in favour to win the ILC. Thus, we expect better contract flow in 2H17, paving for better earnings outlook in 2018.”

From the impact of recent hurricanes such as Harvey and Irma, Kenanga Research believed the potential disruption leading to refineries, platforms and terminals shutdown in US was temporary and thus unable to sustain the push-up for higher oil prices.

“We are still maintaining our 2017E Brent crude forecast of US$51 per barrel in view of limited re- rating catalyst to fundamentally lift oil prices to the US$60 per barrel level.

“Likewise, the support for oil prices is buoyed by higher magnitude of inventory drawdown on healthy oil demand and consumption.

“All in, our preference is still on resilient earnings counters backed by firm contracts. Keep NEUTRAL view on the sector with positive bias.”