Analysts still favour oil and gas players operating within brownfield space

KUALA LUMPUR: Analysts are still favouring players operating within the brownfield space despite the oil and gas sector’s (O&G) third quarter of current year 2018 (3QCY18) disappointing results.

The research arm of Kenanga Investment Bank Bhd (Kenanga Research) deemed the recently concluded 3QCY18 round of corporate results to be underwhelming.

“While majority of the counters within our sector coverage (eight out of 17 stocks) still reported within – expectation results, the quarter saw six results disappointments – doubled from last quarter’s three, and higher than 3QCY17’s four.

“This implies a disappointment ratio of 35 per cent for 3QCY18,” Kenanga Research said.

According to Kenanga Research, results disappointments this time, mainly came from the offshore and upstream space, particularly vessel charterers and upstream engineering contractors.

This was due to poor vessel utilisations coupled with depressing charter rates and slower jobs execution for offshore construction and engineering projects.

However, the research arm noted that companies such as Dayang Enterprise Holdings Bhd (Dayang) found itself in the spotlight with results that blew expectations this time around on the back of increased topside maintenance activities, while Petronas Chemicals Group Bhd also sprung a positive surprise due to stronger average selling price (ASP) and favourable forex.

“Taking into consideration this round of disappointing results, we still favour players operating within the opex-related or brownfield space, rather than players that are dependent on greenfield activities.

“This comes from the backdrop of volatile oil prices, with most of the oil majors still adopting a ‘wait-and-see’ approach before sanctioning high capital expenditure (capex) and multiyear timeline projects.”

Kenanga Research noted that this is especially true for Petroliam Nasional Bhd (Petronas), which the research arm expected to see lower capex going into 2019, given the higher dividend commitment, having already committed a RM30 billion one-off special dividend, on top of the group’s RM24 billion regular pay-out, bringing total expected dividends to RM54 billion - more than double 2018’s RM26 billion, and more than triple 2017’s RM16 billion.

Additionally, the research arm noted that Pengerang Integrated Complex is nearing completion, which had lifted capex numbers for the past one to two years.

With a lower capex landscape, Kenanga Research believed an increase in browfield production is likely in efforts to meet cash flow requirements, potentially benefiting players operating within the brownfield production and offshore maintenance space, such as Dayang and Uzma Bhd, and also downstream players such as Dialog Group Bhd (Dialog) and Serba Dinamik Holdings Bhd (Serba Dinamik).

“Overall, we still see many names within the sector plagued by debt or balance sheet concerns, on top of earnings instability, as evidenced by this round of results.

“Hence, we still find the need to be selective with our stock picks, favouring counters with more resilient nature, manageable balance sheet, and visible earnings delivery - such as Dialog, Serba Dinamik, Yinson Holdings Bhd, on top of Petronas staple names.

“Among them, we pick out Serba Dinamik as our sector top-pick for its commendable earnings growth delivery, coupled with superior return on equity (ROE) against peers.