O&G stocks regain interest as crude price stabilises

This article first appeared in The Edge Malaysia Weekly, on August 19, 2019 - August 25, 2019.
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IN mid-July, JP Morgan revised downwards its Brent crude price forecast for end-2019 to US$59 per barrel from US$65, and to US$52 per barrel from US$59 for end-2020.

“Oil prices firmed recently but we believe the drivers behind this are likely to be short-lived,” it said in its report.

A week earlier, Credit Suisse said in a report that it was raising its 2019 WTI/Brent crude price forecasts slightly from US$58 and US$67 per barrel to US$59 and US$68 per barrel. It added that it was trimming its expectation for Brent crude price in 2020 but saw no change in long-term oil prices.

Most local analysts appear bearish on oil prices. “Given the fragility of sustainable oil price recovery, oil majors remain in austerity mode in terms of opex and capex,” says TA Securities’ Kylie Chan in an early July report.

Nevertheless, it has been more than two years since Brent crude traded below US$50 per barrel. The last time it did so was on July 21, 2017. Since then, oil prices have averaged US$66.78 with a low of US$48.06 on July 21, 2017, and a high of US$86.29 on Oct 3 last year.

“As long as it’s above US$50 (per barrel), there is no reason to panic,” says Public Investment Bank Research oil and gas analyst Nurzulaikha Azali.

Similarly, Maybank’s Liaw Thong Jung says the market may not like volatility but as long as prices are above US$60 per barrel, there are budgeting prospects.

Against this backdrop, The Edge asked a handful of analysts for their top oil and gas stock picks.

Liaw’s choices include Yinson Holdings Bhd, a company whose mainstay is floating production storage and offloading (FPSO) vessels that are used for the production and processing of hydrocarbons, and for storing oil.

Yinson has five FPSOs operating in Malaysia, Ghana, Nigeria and Vietnam and one floating storage and offloading (FSO) vessel with a locked-in charter in Vietnam, other than a few offshore support vessels that are not very significant.

“Yinson is leveraged to capitalise on FPSO contracts,” Liaw says in a brief conversation. In a June report, he highlights that demand for FPSOs would be exceptional this year with as many as 19 new jobs with capex of US$17 billion up for grabs for eight of the world’s largest FPSO operators, including Yinson.

In its first financial quarter ended April 30, Yinson registered a net profit of RM49.85 million (down 17.51% year on year) on revenue of RM209 million (down 11.13% year on year).

On its prospects, Yinson says, “The long-term outlook for the oil and gas industry remains challenging with the emergence of new alternative energy resources and financial institutions’ risk appetite for the sector … Nevertheless, management is optimistic that the industry will replenish its production capacity with new FPSO awards in the current financial year to counter the lagging investment effect of the past years.”

Liaw has a “buy” call on Yinson and a 12-month target price of RM9.45 on the stock. This is at a 41.25% premium to the stock’s close of RM6.69 last Thursday.

Another stock favoured by Liaw is Dialog Group Bhd, which is a storage tank operator in Pengerang, Johor, and a favourite of most oil and gas analysts.

To recap, Dialog operates an independent terminal with an oil storage capacity of 1.3 million cu m and comes complete with a dedicated deepwater jetty facility. The terminal commenced operations in April 2014. It is currently being expanded by another 430,000 cu m, which involves the construction of a dedicated petroleum and petrochemicals terminal. Work on the latter began in 2015.

At its close of RM3.52 last Thursday, Dialog was trading at a historical price-earnings ratio (PER) of 38.9 times. The stock hit its 52-week high of RM3.66 on Sept 20 last year and has not lost its momentum since.

“The company has a high PER, that is one thing. But storage terminals are a cash flow business. It (Dialog) does not have an order book but stable, consistent cash flow,” Liaw points out.

Alex Goh of AmInvestment Bank Bhd adds that Dialog has substantial land bank in Pengerang, Johor, which has not been revalued. “It’s pricey but people are looking to the future.”

Dialog’s annual report reveals that it has more than 200 acres in Johor, largely in the Pengerang area, with a carrying value of almost RM270 million.

In its nine months ended March 31, the company chalked up a net profit of 395.13 million on turnover of RM1.94 billion. In the corresponding period a year ago, net profit was flat while revenue dipped 22%. As at March 31, Dialog’s net asset value per share was 66.5 sen.

Goh has pegged a fair value of RM3.85 to Dialog and has a “buy” call on it.

Sean Lim of Hong Leong Investment Bank says, “When other stocks you hold have a high PER, you worry, but not when you hold Dialog. It’s a safe bet,” he says.

For Nurzulaikha of Public IB Research, Dialog is one of her top stock picks because its business is not impacted by oil price fluctuations. “There is recurring business and the momentum is ongoing,” she says.

Serba Dinamik Holdings Bhd is also among her top picks in the oil and gas sector.

TA Securities’ Chan and AmInvestment Bank’s Goh too view Serba Dinamik positively. “Serba Dinamik has at least three to four years of earnings … very resilient,” says Chan.

Serba Dinamik’s businesses range from integrated engineering services for oil and gas production platforms and crude oil and gas refineries to petrochemical manufacturing plants, LNG plants and power production plants.

Chan likes the fact that Serba Dinamik is diversifying its earnings base via stable associate stakes in areas such as utilities. She has a “buy” call on Serba Dinamik and a target price of RM5 on the stock, which was at a 20.48% premium to its close last Thursday of RM4.15.

It is noteworthy that unlike many other local oil and gas companies, Serba Dinamik has a presence abroad. This means it is not totally dependent on national oil company Petroliam Nasional Bhd (Petronas) for jobs.

In its first financial quarter ended March 31, Serba Dinamik raked in a net profit of RM112.15 million on revenue of RM984.39 million. In the previous corresponding period, net profit was RM92.65 million on revenue of RM730.82 million.

Interestingly, both Chan and Liaw list Malaysia Marine and Heavy Engineering Holdings Bhd (MMHE) as a top pick in the oil and gas sector. “(MMHE’s) valuations have been bashed down,” observes Chan.

The counter has gained more than 60% since hitting its 52-week low of 49.5 sen in December last year and closed at 80 sen last Thursday. Its net asset value per share as at June 30 was RM1.48.

Liaw says he likes MMHE because it inked a long-term agreement with Saudi Aramco in December last year for the provision of engineering, procurement, construction, installation and commissioning work for offshore facilities, which basically gives the company an advantage when bidding for contracts from the Saudi oil giant.

“(The long-term agreement with Saudi Aramco) is very significant. They (Saudi Aramco) usually give out more than US$3 billion in (fabrication) work. Just one job (a year) will give MMHE stability,” he points out.

MMHE is a 66.5% unit of national carrier MISC Bhd, which in turn is a 62.67% unit of Petronas. It operates a fabrication yard on more than 400 acres in Teluk Ramunia in Johor.

It is noteworthy that though MMHE has an order book of more than RM3 billion, it has not posted a profit in seven quarters. In its six months ended June 30, the company suffered a net loss of RM38.84 million on sales of RM479.56 million. In the previous corresponding period, net loss was RM74.75 million on revenue of RM411.31 million.

Chan has set a target price of RM1.05 for the stock, which indicates an upside potential of 31.25%.

Liaw and Chan also like Velesto Energy Bhd, a rig owner and operator of seven offshore drilling rigs and four hydraulic workover units, and which is close to 63%-controlled by state-owned Permodalan Nasional Bhd and its units.

Liaw likes Velesto because of the recovery in the oil and gas sector. “Utilisation is up, daily charter rates are also up, the sector is turning around and earnings are going to turn around,” he explains.

In its first quarter ended March 31, Velesto suffered a net loss of RM22.22 million on revenue of RM127.03 million. It had accumulated losses of RM2.2 billion as at March 31.

Commenting on the outlook for its drilling segment, which is its main revenue generator, Velesto says, “The increased demand for both jack-up drilling rigs and hydraulic workover units is expected to benefit the group, as it is the main player in the segment with strong domestic and regional track record. A gradual improvement in time charter rates is also seen based on recently awarded contracts.”

Liaw has a “buy” call on Velesto and a target price of 33 sen for the stock, which is at a 10% premium to its close of 30 sen last Thursday. At 30 sen, Velesto had a market value of RM2.46 billion.

Dayang Enterprise Holdings Bhd is another oil and gas company highlighted by analysts.

Hong Leong IB’s Lim says his “buy” call on Dayang is premised on earnings play. “They (Dayang) are in the upstream maintenance segment, so if they can maintain their margins, they will do well.”

Dayang’s 60.47%-owned unit, Perdana Petroleum Bhd, whose core business is offshore support vessels, is likely to generate interest in the near term.

In its first financial quarter ended March 31, Dayang suffered a net loss of RM4.13 million on sales of RM156.41 million. In the previous corresponding period, it lost RM21.31 million on revenue of RM148.78 million.

Since the beginning of the year, Dayang’s stock has gained more than 150%. It closed at RM1.38 last Thursday, giving the company a market capitalisation of RM1.33 billion.

Interestingly, Lim also recommends a “buy” on FPSO owner and operator Bumi Armada Bhd, although the stock is not one of his top picks. “Wait for the upcoming quarters, things will pick up at Kraken,” he says.

To recap, Bumi Armada, which is 34.89%-controlled by businessman T Ananda Krishnan, was awarded a contract by oil company EnQuest to supply and operate the Armada Kraken FPSO in the East Shetland basin, which is about 400km northeast of Aberdeen.

Armada Kraken arrived on location in February 2017 and first oil was achieved in June that year. However, there have been disputes, which have resulted in massive impairments at Bumi Armada.

In its first three months of FY2019, Bumi Armada generated a net profit of RM62.21 million on sales of RM491.61 million. As at March 31, Bumi Armada had negative reserves of RM990.95 million.

For Nurzulaikha, EA Technique (M) Bhd is also a top oil and gas stock pick. She has an “outperform’ call on the stock and a 12-month target price of 90 sen, which is at a 140% premium to its close of 37.5 sen last Thursday.

“What I like is it (EA Technique’s financial performance) is not linked to oil prices. It is in storage, it’s a small company,” she says. At its close last Thursday, EA Technique had a market capitalisation of RM189 million.

The company made a net profit of RM9.13 million in its first quarter ended March 31 on revenue of RM66.45 million. In the previous corresponding period, it raked in RM17.21 million on revenue of RM63.82 million.

EA Technique is about 52%-owned by Johor Corp, which in turn is controlled by the Johor government.

Nurzulaikha also likes Sapura Energy Bhd, which she says is likely to break even this year and turn the corner next year. She likes it as a trading counter at present.

Sapura Energy, which at its peak was among the largest oil and gas service providers in the world, ended at 27 sen last Thursday, which translated into a market value of RM4.3 billion.

In its first three months ended April 30, the company posted a net loss of RM110 million on revenue of RM1.63 billion.

PNB is Sapura’s largest shareholder with about 38% equity interest. Another substantial shareholder is its president and CEO, Tan Sri Sahahril Shamsuddin, with about a 13.88% stake.



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