ARMADA and SAPURA KENCANA top pick....
Stock picking key to investing in O&G sector
Oil and gas (O&G) sector
Downgrade to “neutral” from “overweight”: In view of the lower oil prices, Petroliam Nasional Bhd (Petronas) is looking at cutting its 2015 capital expenditure (capex) by 15% to 20%. The scope and scale of Petronas’ capex cut are worse than expected and we downgrade the sector to “neutral”.
Under current circumstances, stock picking is the key to investing in the sector. We like companies with integrated business models, good geographical spread and stocks that are oversold, for example, SapuraKencana Petroleum Bhd and Bumi Armada Bhd. Avoid pricey, single-business stocks.
The brent crude price fell to a five-year low of US$70 (RM240) per barrel (-32% quarter-on-quarter) on the Organization of Petroleum Exporting Countries (Opec)’s decision to maintain its production ceiling. Petronas announced last Friday that the group will not award new marginal field contracts unless oil settles above US$80 per barrel. Also, the projects in Pengerang, Johor that have yet to receive the final investment decision (FID) will be affected by the cutbacks.
The worse-than-expected Petronas’ capex, coupled with the imminent capex cut by other oil companies following the plunge in crude oil price, will translate into lower earnings and weaker investor appetite for the domestic O&G stocks. We have therefore lowered the earnings and target price (TP) of six O&G companies under our coverage and downgraded the sector rating to “neutral”.
We generally prefer companies focusing on the production (vs exploration), downstream (vs upstream), service providers (vs asset owners), and big caps (vs small caps). We recommend investors to accumulate the companies with integrated business models, strong order book backlog and good geographical spread that are oversold — SapuraKencana (buy, TP of RM3.60) and Bumi Armada (buy, TP of RM1.70). Avoid single-business stocks that may see an earnings downgrade due to overly bullish consensus earnings forecast — UMW Oil & Gas Corp Bhd (sell, TP of RM2.40) and pricey stocks such as Dialog Group Bhd (reduce, TP of RM3.60). — AffinHwang Capital Research, Dec 1
