AmInvestment remains 'overweight' on O&G sector as crude oil prices recover

AmInvestment remains 'overweight' on O&G sector as crude oil prices recover
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KUALA LUMPUR (Sept 7): AmInvestment Bank Research has maintained its “overweight” rating of the oil and gas (O&G) sector as crude oil prices recovered from an earlier slip due to Covid-19 Delta variant concerns.

In a note today, its analyst Alex Goh said Brent crude oil prices had recovered to above US$70 (about RM290.32) per barrel currently after falling to US$65 per barrel on Aug 20 on concerns that the Covid-19 Delta variant could dampen global demand.

He maintained his 2021-2022 price projections at US$65-US$70 per barrel as US inventories slid 15% from the year-to-date (YTD) peak of 502 million barrels on March 26 to below pre-pandemic levels at 425 million barrels currently.

“While US shale production could rebound and the Organization of the Petroleum Exporting Countries (OPEC) may continue to raise production quotas against the backdrop of the brighter oil price environment, this could be mitigated by rising global demand on the back of Covid-19 vaccine roll-outs in 2H21 (the second half of 2021),” he added.

Goh also noted that the O&G sector’s core second quarter ended June 30, 2021 (2Q21) net profit rose 30% quarter-on-quarter (q-o-q) to RM3.3 billion largely due to higher prices for Petronas Chemicals Group Bhd (PetChem), MISC Bhd’s lumpy gains from a renegotiated lightering contract and Sapura Energy Bhd’s lower losses.

He added that this was partly offset by higher internal gas consumption and maintenance costs for Petronas Gas Bhd (PetGas) and slower recognition of lease-based construction revenue from Yinson Holdings Bhd’s Anna Nery floating production, storage and offloading (FPSO) vessel conversion project.

“All in, this raised the 2Q21 earnings before interest, taxes, depreciation and amortisation (EBITDA) margin by two percentage points to 40%,” he said.

However, Goh also noted that contract roll-outs were still being impacted by the global pandemic, movement restrictions and energy transition policies, which caused 2Q21 awards to decrease 33% q-o-q to RM2.2 billion.

Goh’s “overweight” rating of the sector is further underpinned by his eight “buy” calls versus only one “sell” call.

He continues to like Dialog Group Bhd for its resilient cyclical tank terminal and maintenance-based operations and Yinson for its strong earnings growth momentum from the full-year contribution of its FPSO vessels.

Goh also likes Sapura Energy as its completed RM10 billion debt restructuring package positions the group to secure fresh global orders.

Meanwhile, he said PetGas offers highly compelling dividend yields from its optimal capital structure strategy and resilient earnings base.

Joyce Goh