O&G stocks not gaining despite earnings visibility

UOB Kay Hian maintains ‘market weight’ call on sector

PETALING JAYA: Local oil and gas stocks are still not benefitting from earnings visibility and the higher oil price environment.

UOB Kay Hian Research said its sector theme was to invest in companies that have visibility for earnings upgrades, and do not depend on Petroliam Nasional Bhd (Petronas) work orders.

“International contractors and FPSO players have a stronger correlation to international industry recovery,” it said.

The research house, which maintained its “market weight” call on the sector, said it expects Brent forecasts will adjust upwards as global producers keep supply-demand closely matched.

“In our view, the entitled gas volumes decline (vs higher capacity) is hampering Petronas’ cash flow growth.

“We concur with industry players that maintenance and production enhancement activities must resume to ensure volume growth, which will in turn sustain Petronas’ cash flow and government obligations,” it said.

The research house noted that contract roll outs had been poor in comparison to the plans dictated by Petronas activity outlook.

“Sustainably higher oil prices should allow Petronas the confidence to boost utilisation for contractors, even if service rates continue to be low,” it added.

The research house also expects selected companies’ earnings visibility to improve in tandem with utilisation.

Its top “buy” is Serba Dinamik, as the international operations and maintenance (O&M) and engineering, procurement, construction and commissioning (EPCC) contractor should see earnings rerating from a growing orderbook to over RM7bil.

“We like FPSO players Bumi Armada, as earnings and investor confidence will improve on higher Kraken/Olombendo recognition from May 2018, and Yinson Holdings given long-term earnings rerating from FPSO Layang and another mega contracts,” it said.

As for its “sell” calls, it said MISC and Deleum had trended below its target prices since downgrading the stocks to “sell” a few weeks ago due to earnings risks.

On Petronas, the research house said its Q1’18 capex appeared to be behind its 2018 capex guidance of RM55bil, based on a US$52/ bbl assumption.

It said this was likely to be due to ebitda for the quarter of RM23mil being “unimpressive” despite higher oil prices.

“Petronas continues to stress that cost-effective measures must continue to ensure the industry’s sustainability,” it said.