Oil and gas sector
Maintain neutral on upstream, positive on downstream: We expect the oil price to trade between the US$60-US$65 (RM244-RM265) per barrel (pb) range and to average at US$65pb in 2020.
While in general a higher crude oil price is favourable to encourage the continued spending of oil and gas (O&G) exploration and production (E&P) producers, we opine that a stable and sustainable oil price will be even more favourable to O&G companies in the current operating climate. It is to enable a proper planning for future capital expenditure 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-US$70pb oil price level as current production costs range from US$30-US$40pb for offshore production while for onshore production, the cost is even lower which will ensure the current upbeat momentum of offshore and onshore activities will be sustained.
Hence, looking at the current operating climate we reiterate our view that local O&G service companies involved in drilling, fabrication and vessel providers (floating production storage and offloading [FPSO] and offshore support vessels) will continue to benefit from the upbeat offshore activities going into 2020. For the upstream services segment, we remain bullish on Dayang Enterprise Bhd (“buy”; target price [TP]: RM2.69) as the company can expect to benefit from its synergy with Perdana Petroleum Bhd in providing vessels to E&P players and more active offshore maintenance works. We also like Bumi Armada Bhd (“buy”; TP: 56 sen) due to its improving operational conditions as well as its position as the largest FPSO 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 beneficiaries of the soon-to-be operational Pengerang Integrated Petroleum Complex.
For the downstream sub-sector of the O&G industry, we remain 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) as despite industry-specific challenges, we opine that demand for downstream products remains robust and that external disruptions are temporary in nature which will not halt the respective companies’ growth going forward. — MIDF Research, Jan 10