Oil & gas sector
Maintain neutral: Brent crude oil breached US$80/bbl. The Organisation of the Petroleum Exporting Countries (Opec)-led collaborative production cuts have resulted in a more stabilised oil price environment, with Brent crude oil hovering at around the US$70-80/bbl level recently, as compared to around the US$50/bbl a year ago. While some declines in emerging market currencies earlier in the year may have contributed to increased concerns regarding the global economic growth, and hence, oil demand, this was offset by the re-stating of US sanctions on Iran, leading to further supply-side constrains and driving crude prices to breach the US$80/bbl-mark in late-August to reach a four-year high. In fact, studying US Energy Information Administration’s supply and demand data, we found that oil production has mostly been in a supply-deficit (demand more than supply) for most of 2018. From here, we may look towards the upcoming Opec’s meeting in early-December, where we firmly believe Opec would reiterate its stance on production-cut compliance. All in, we foresee crude oil prices averaging at around US$75/bbl for 2018-2019.

 
Despite the stabilising oil prices, this has not been reflected in any strong recovery in contract flow towards local oil and gas players. Up until September, we have seen a total of 36 contracts were announced among local listed oil and gas (O&G) players, identical to last year’s corresponding period. Comparatively, contract flow was at more than 100 per year during 2013-2014 when oil prices were more than US$100/bbl, and even in 2015 after the plunge of oil prices, 96 contracts were announced. With all that said, we believe contracts flow should gradually recover over the next 1-2 years as oil majors regain sufficient comfort in dishing out jobs amid the stabilising oil prices. More particularly, we expect to see an increase in work-order based contracts (for example maintenance or umbrella basis contracts) as oil producers may choose to increase production in brown fields to immediately capitalise on the higher oil prices. Meanwhile, green field-based projects (for example exploration or new-oil production based jobs) could see a lagged surge given its huge capital expenditure nature and drawn-out planning process.

Naturally, top names that come to mind as immediate beneficiaries of a higher oil price environment include those with direct exploration and production exposures such as Sapura Energy Bhd (market perform, cum/ex-TP: 41 sen/34 sen), Reach Energy Bhd (not rated) and Hibiscus Petroleum Bhd (not rated). Meanwhile, Uzma Bhd (outperform, TP: RM1.65) could also benefit from its position in the well-intervention space should we see an increase in brown field production. In fact, based on our correlation study, Uzma has actually shown to have one of the more consistent positive correlations over 10-year, 5-year and 3-year periods among our O&G coverage universe. Dayang Enterprise Holdings Bhd (outperform, TP: 98 sen) could also benefit from an increased number of maintenance work orders given that many of them have been deferred previously during times of low oil prices. Elsewhere in the green field space, we also favour Yinson Holdings Bhd (outperform, TP: RM5) to benefit from an improving floating production storage and offloading (FPSO)-market underpinned by the increased number of green field investments globally.

Maintain “neutral”, albeit with positive biasness. While we are leaning towards a slightly more positive outlook for the oil and gas sector, we have rationalised some of our calls during the recently ended quarter, thus seeing seven downgraded calls (out of 16 stocks) within our coverage. Several players are still saddled by debt-related issues (that is Alam Maritim Resources Bhd, Bumi Armada Bhd, Sapura Energy), while some others are still expected to show volatile earnings for now. That said, post rationalisation, we are fairly confident in the remaining “outperform” calls that we have, given that they are quality names with growth potentials and are backed by solid fundamentals. Among all, we have selected Serba Dinamik Holdings Bhd (outperform, TP: RM4.45) as our top pick, given its promising growth and consistent earnings delivery, dynamic expansions into new regions through organic and inorganic growth, and superior return on equity against many of its peers. — Kenanga Research, Oct 3