This article first appeared in The Edge Financial Daily on January 9, 2020
Oil and gas sector
Maintain neutral: Oil and gas (O&G) stocks generally outperformed the broader market in 2019, with top sector gainers mostly beneficiaries of Petroliam Nasional Bhd’s (Petronas) Activity Outlook, particularly the small- and mid-cap names. We believe 2020 will be similar with the focus on jack-up rigs, offshore support vessels (OSVs), offshore maintenance and fabrication players. In our view, 2020 activity appears positive and could possibly match that of last year, continuing to make the sector attractive for investors. To play this theme, we highlight Dialog Group Bhd, Serba Dinamik Holdings Bhd, Velesto Energy Bhd and Bumi Armada Bhd.
Though we saw a 13% drop in overall contract value in the sector in 2019, the number of contracts awarded increased by 37% year-on-year. More positively, work activity, according to the recently released Petronas Activity Outlook, looks sustainable in the new year.
The recent air strike killing a top Iranian official has sparked another round of geopolitical tensions, resulting in the Brent oil price soaring to a high of US$70 (RM287) per barrel (bbl). Notwithstanding this, we expect the Brent oil price to remain muted in 2020 as the oil market is still largely oversupplied. Global demand is projected to improve from the second half of 2020, with tighter supply from the fourth quarter. We forecast 2020’s Brent oil price to trade in the range of US$60 to US$65/bbl. However, we acknowledge that near-term global oil prices will likely ride on any developments in US-China negotiations and, more so, any escalation of tensions between the US and Iran.
Though we have a “neutral” call on the sector, largely weighed down by our ratings for the large-caps, we believe investors should maintain focused on the beneficiaries of the Petronas Activity Outlook. We recommend “buy” for Dialog for its long-term recurring income play as well as Serba Dinamik for promising order book growth (both are beneficiaries of downstream plant maintenance and turnarounds), and Velesto Energy for improving jack-up utilisation and daily charter rates, and Bumi Armada for a recovery in the OSV space. We remain cautious about large-caps and retain our “sell” rating for Petronas Chemicals Group Bhd given challenging product prices and the risk of the company incurring losses for its Pengerang Refinery and Petrochemical Integrated Development plant’s maiden year of operations. — Affin Hwang Capital, Jan 8