O&G 2Q earnings within expectation
Business & Markets 2013
Written by Maybank IB Research
Friday, 06 September 2013 11:03
Oil and gas sector
Maintain overweight: Core net profit of our research universe in the oil and gas (O&G) sector was generally within expectation for the third consecutive quarter.
Net profit rose 23% quarter-on-quarter (q-o-q) and 20% year-on-year (ex-PETRONAS GAS BHD []’s tax credit) in the second quarter of 2013 (2Q13) on seasonal strength. The upbeat momentum is likely to continue into the second half (2H) of 2013.
While Petroliam Nasional Bhd (Petronas) has cautioned on a slowdown in awards, the market has partly priced this in. The slowdown, in our view, will likely have a greater impact on its onshore projects (for example, the refinery and petrochemical integrated development [Rapid] in Johor).
Petronas will continue with its domestic offshore exploration and production (E&P) programmes. Overall, we are selective on our picks, pegging them to thematics. We continue to like Bumi Armada Bhd, SapuraKENCANA PETROLEUM BHD [] and PERISAI PETROLEUM TEKNOLOGI [] Bhd and we upgrade Malaysia Marine and Heavy Engineering Holdings Bhd (MHB) to “buy”.
The majority of the results tracked our expectations. Of the 10 stocks that released their results in August, KNM GROUP BHD [] was the notable exception, surprising on the upside due to improved margins. Petronas Gas’ results were skewed by tax credits, but were otherwise in line.
While Perisai’s results were tracking to expectations, we lowered its 2013 financial year (FY13) and FY14 earnings by 3% and 4%, respectively and target price by 6% to account for lower utilisation of its pipelay barge, E3, by 75 to 90 days.
While Petronas has raised concerns over project cost escalations, tender delays and project reviews, which could lead to projects being scrapped if the economic returns are not compelling, the market has partially priced in this outlook.
We reckon that its onstream development (Rapid project, for example) is likely to suffer more than its offshore projects following the need to address the depleting domestic hydrocarbon production. The nation’s net export number for crude petroleum has been declining rapidly since 2011 and is now at its lowest to date. Any slowdown in tackling this issue could see Malaysia turning into a net importer nation soon.
Fabrication orders are set for a strong rollout after a long lull, beset by tender delays. The drilling space is also expected to create some excitement, with: (i) higher drilling activities; (ii) import substitution; and (iii) replacements for ageing rigs bringing about thematic plays.
The offshore support vessel (OSV) and floating, production, Storage and offloading (FPSO) markets are also expected to see a pick-up, both locally (for OSV) and overseas (for FPSO).
We also do not rule out more marginal and rejuvenation field awards, considering that Petronas had recently set up Vestigo Sdn Bhd, its marginal field development arm, to expedite development activities.
We expect Bumi Armada to be in the spotlight by end-2013 when FPSO projects are awarded. With 12 tenders in the pipeline, the company expects to pick up two new jobs (namely, Kraken and Madura).
MHB, together with SapuraKencana, in our view are prime beneficiaries for new fabrication works. SapuraKencana will also benefit from risk sharing contracts and potentially transport and installation projects while Perisai will likely gain from import substitution in the jack-up drilling space.
ALAM MARITIM RESOURCES BHD [] and Perdana Petroleum Bhd are primary beneficiaries from the subsequent waves of Petronas’ OSV contracts.
We upgrade MHB to a “buy” due to increasing fabrication contract flow potential. — Maybank IB Research, Sept 5
This article first appeared in The Edge Financial Daily, on September 06, 2013.