O&G to see better performance from improved crude oil prices, stronger contract values

PETALING JAYA: The oil and gas (O&G) sector, whose second quarter (Q2 17) results came in line with analysts estimates, is poised to chart better performance for the year on the back of improved crude oil prices, stronger sector contract flows and Petronas commitment to raise dividend payment for FY 2017 .

Analysts told StarBiz that the sector is on a cyclical recovery after bottoming and expect contract flows to pick up in the fourth quarter. 

They concurred that the commitment by the national oil company to up its dividend payment for FY 17 is positive for the O&G sector.

Many are bullish that oil prices will inch upwards by year-end or next year which would spur capital expenditure (capex) growth and revive upstream activities, adding that Q2 17 earnings were better year-on-year (y-o-y) due to downstream players. 

Maybank IB research analyst Liaw Thong Jung is estimating oil price for this year to be at US$51.80 per barrel (bbl), noting that the sector has bottomed out and on a cyclical recovery.

“An accelerated rebalancing of the global crude oil market will spur capex growth. Our Economics Team’s crude oil price forecast is
US$51.80/bbl average for 2017. Since global capex has been relatively flat y-o-y in 2017, a pick-up in spending would be an encouragement,’’ he noted. 

Liaw noted that Petronas RM60bil capex commitment for 2017 (+20% y-o-y) is positive and the sector is slowly seeing a revival in upstream activities i.e. rising drilling works. 

The pipeline for tenders is also gradually filling up, of which most (i.e. offshore support vessel (OSV)) are back-loaded in the second half of this year. 

Maybank IB, which is maintaining its positive stance on the sector, said its four key stock buys are Dialog, ( A direct proxy to Petronas RAPID and Pengerang play), Sapura Energy (A direct proxy, beta play for the O&G sector), Wah Seong (strong earnings visibility over the next three years,
backed by the EUR600mil NS2 job) and Yinson (Undemanding valuations with strong earnings growth prospects, cashflow strength and proven execution capabilities).

Out of the seven stocks under the research house’s coverage, five, or 71% came in line for its Q2 earnings. Similar to Q1 17, Dialog again came in above Maybank IB’s consensus, leading to upgrades in earnings/DPS estimates and target price. 

Conversely, Barakah disappointed, mainly due to the slowdown in work orders and acute delay in its call-up operations (Pan Malaysia T&I), which
led to a cut in earnings forecasts, it noted. 

Meanwhile, Affin Hwang Capital Research, which is maintaining its neutral call in the sector, said it remained confident that contract flows in 2017
will surpass 2016 levels. 

“We tone down our expectations and now look for Brent prices to be in a range of US$50-55/bbl in 2017 (from US$55/bbl) and US$55-60/bbl in 2018. Our view on long-term oil prices is unchanged at US$60-65/bbl,’’ it added.

In terms of contract flows. the brokerage said so far in Q3 17, contract values were down 87% q-o-q to RM1bil. Apart from that, the number of contracts awarded came to just six, versus 17 in Q2 17. 

“We expect contract flows to pick up for the rest of 2017 following the award of Petronas’ modification, construction and maintenance (MCM) contract,’’ Affin Hwang added.

Core net profit for O&G companies under the research house’s coverage posted a 27.5% y-o-y growth in the recently concluded reporting season, mainly supported by Petronas Chemical, Bumi Armada and Dialog.

Of the 12 stocks under Affin Hwang’s coverage, two exceeded its expectations, seven were in line and two fell short of our expectations. Sapura
Energy plans to release its Q2 18 (FY Jan) results later this month.