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Oil and gas sector
Maintain overweight:
A stronger US dollar to ringgit favours rigs, floaters, tank terminal, and shipbuilding operations but works against companies with US dollar borrowings and revenue in ringgit.

Gearing levels are generally manageable but impairment could affect a few companies due to low oil prices and immobilisation of assets.  Values have emerged, positioning ahead of recovery; Yinson Holdings Bhd, Bumi Armada Bhd, Dialog Group Bhd and Perdana Petroleum Bhd are key “buys”.

The US dollar has appreciated by 11% to RM3.56 since the crude oil price (dated Brent) retreated to a one-year low of US$46 (RM165.60) per barrel to date.  We assess the currency and debt impact to the oil and gas (O&G) companies’ financials (earnings, debt servicing, gearing and so on). 

A stronger US dollar to ringgit would generally have a positive impact on companies with sales in US dollars and costs in ringgit, due to foreign exchange gain. They are the rigs (UMW Oil & Gas Corp Bhd, Perisai Petroleum Teknologi Bhd [Perisai], SapuraKencana Petroleum Bhd, Coastal Contracts Bhd), floaters (Yinson, Bumi Armada, SapuraKencana, Perisai), tank terminals (Dialog Group), and shipbuilding operations. 

Companies with US dollar borrowings and revenue in ringgit, would see an adverse impact, for profits will be hurt by higher interest expense. The net gearing levels for O&G companies are generally manageable.There has generally been an improvement over 2008, with tighter capital discipline across most companies. Nonetheless, we are not ruling out several companies potentially facing impairment on off-hire assets. Syariah compliance is an increasingly important agenda. 

SapuraKencana and Perisai Petroleum Teknologi have recently converted part of the conventional debts into Islamic loans, and could potentially be reinstated as syariah compliant as early as May 2015. We advocate a preference for operations in the production phase, which tends to be less sensitive to capital expenditure cut and oil price volatility. — Maybank Investment Bank Bhd, Jan 22

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This article first appeared in The Edge Financial Daily, on January 23, 2015.

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