Positive outlook for firms in drilling, fabrication and vessel provision going into 2020 - MIDF Research

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KUALA LUMPUR (Jan 10): MIDF Research has maintained ‘Neutral’ on the upstream and ‘Positive’ on the downstream subsectors of the oil and gas (O&G) sector, and said it reiterated its view that local O&G services companies that are involved in drilling, fabrication and vessel providers continue to benefit from the upbeat offshore activities going into 2020.

In a sector note today, the research house said that higher crude oil price is generally favourable to encourage the continued spending of O&G exploration and production (E&P) producers; it opines that a stable and sustainable oil price will be even more favourable to the O&G companies in the current operating climate.

“It is to enable a proper planning for future capital expenditure (capex) to be conducted using predictable parameters rather than projecting numbers in an extreme environment.

“That said, we understand that most E&P producers are comfortable at the current US$60-70pb oil price level as current production costs ranges from US$30-40pb for offshore production whilst for onshore productions,” it said.

Moving forward, it said while both the US and Iran seemed to have come to a stand-off following the US-Iran tension, many are unconvinced that the crisis will end there.

MIDF Research said it does not believe that at this juncture further escalation will take place. However, it said it opines that should any escalation resulting from the attacks or rise in internal pressure happens, it will potentially result in a target placed on US-related assets and oil-related assets.

It also said that this could lead to a temporary disruption in oil supply and rise in oil price.

“We believe there will be a temporary knee-jerk reaction towards the oil price - should there be an escalation of attack. It will be similar to that of the recent attack on Saudi Aramco’s oil facilities – the Abqaiq and Khurais oil facilities, back in September 2019 which wiped out 5.7mbpd of crude supply from the market,” it added.

The research house said it opines the current stand-off between US and Iran will lead to a more sustainable oil price movement and a more stable outlook for the oil and gas industry.

“Some 20% of the world’s oil supply originates from the Middle East. Therefore, any tensions surrounding the region and Strait of Hormuz will disrupt world trade and oil supply.

“Members of the Organization of Petroleum Exporting Countries (OPEC) in recent interviews with various news agencies stated that they are vulnerable to regional conflicts and unable to cope should there be an attack by Iran on their oil facilities,” it said.

Therefore, it said it reiterates its view that the situation is unlikely to escalate further at this juncture and it expects oil price to trade between the US$60-65pb range and to average at USD65pb in 2020.

In addition, MIDF Research said it reiterates its FBM KLCI 2020 baseline target at 1,680 points as it does not expect further escalation to the crisis as both sides seem unwilling.

For the upstream services segment, it said it remains bullish on Dayang Enterprise Bhd (‘buy’, target price [TP]: RM2.69) as the company can expect to benefit from its synergy with Perdana Petroleum in providing vessels to E&P players and more active offshore maintenance works.

It also likes Bumi Armada Bhd (‘buy’, TP: 56 sen) due to its improving operational conditions as well as its position as the largest FPSO (floating production, storage and offloading) provider in Malaysia.

“We are also favourable towards Dialog Group Bhd (‘buy’, TP: RM3.83) specifically due to its stable recurring income from its tank farm business and due to it being one of the main beneficiary of the soon-to-be operational Pengerang Integrated Complex (PIC),” it added.

For the downstream subsector of the O&G industry, the research house said it remains positive on Petronas Chemicals Group Bhd (‘buy’; TP: RM8.77), Petronas Dagangan Bhd (‘buy’; TP: RM27.75) and Gas Malaysia Bhd (‘buy’; TP: RM3.11).

It said it opines that the demand for downstream products remains robust despite industry-specific challenges.

The external disruptions are temporary in nature which will not halt the respective companies’ growth going forward, it said.