This article first appeared in The Edge Financial Daily on December 5, 2018

Oil & Gas sector
Maintain neutral: While majority of the counters within our sector coverage — eight of 17 stocks — still reported within-expectation results, the quarter saw six disappointing results, doubled from last quarter’s three, and higher than the third quarter of calendar year 2017’s (3QCY17) four. This implies a disappointing ratio of 35% for 3QCY18.

Meanwhile, the number of outperformers remained flat from the last quarter at two, but was significantly lower than five in 3QCY17. We noticed the disappointing results mainly came from the offshore and upstream spaces, particularly vessel charterers and upstream engineering contractors, due to poor vessel utilisations coupled with depressing charter rates, and slower jobs execution for offshore construction and engineering projects.

This time around, the disappointments included Malaysia Marine And Heavy Engineering Holdings Bhd, due to sustained losses from the marine and heavy engineering segments; MISC Bhd, from higher transporting liquefied natural gas vessels dry-docking, while its petroleum shipping remained loss-making; Sapura Energy Bhd, as its engineering and construction segment plunged into losses, while its drilling segment also continued to sustain losses; Uzma Bhd, due to operational hiccups from its D18 contract and Uzmapress units; Wah Seong Corp Bhd, dragged by widening losses from Petra Energy Bhd due to lower hook-up commissioning activities; and Yinson Holdings Bhd, due to under-forecasted finance costs.

Meanwhile, Dayang Enterprise Holdings Bhd was in the spotlight with results that blew expectations this time around on the back of increased topside maintenance activities. Petronas Chemicals Group Bhd also sprang a positive surprise due to a stronger average selling price and a favourable foreign exchange.

We still favour players operating within the operational expenditure-related or brownfield space, rather than players dependent on greenfield activities on the back of volatile oil prices, with most of the oil majors still adopting a “wait-and-see” approach before sanctioning high capital expenditure (capex) and multi-year timeline projects.

This is especially true for Petroliam Nasional Bhd, which we expect to see lower capex going into 2019, given a higher dividend commitment, having committed a RM30 billion one-off special dividend, on top of its RM24 billion regular payout, bringing total expected dividends to RM54 billion — more than double 2018’s RM26 billion, and more than triple 2017’s RM16 billion; and the Pengerang Integrated Complex nearing completion, which lifted capex for the past one to two years.

With a lower capex, we believe an increase in brownfield 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, and downstream players such as Dialog Group Bhd and Serba Dinamik Holdings Bhd. — Kenanga Research, Dec 4