Oil & Gas : UOB Kay Hian Research retains Overweight on oil, gas stocksKUALA LUMPUR: UOB Kay Hian Malaysia Research is maintaining its Overweight recommendation on the Malaysian oil and gas sector with Bumi Armada, Barakah Offshore Petroleum and Deleum as its compelling stocks.
It said on Tuesday crude oil prices – which had fallen to below US$60 a barrel from a high of US$100 in July -- would eventually recover over the medium term.
The research house said following up after Petronas president and chief executive Tan Sri Shamsul Azhar Abbas that the national oil corporation will likely cut capex by 15%-20%, most companies under its coverage continue to be relatively sanguine on their prospects, given their higher reliance on brownfield and less dependence on capex (that is, project initiations) spending.
UOB Kay Hian Research also pointed out Petronas also highlighted that the “new era’ for oil in the near term could be at US$70-US$75, at least until end-2015.
“We reiterate our view that while the outlook looks negative in the near term, and take note that selected OPEC members and industry experts have expressed a likely floor level for Brent of US$60 to US$70 for a while in order to have stability in the years ahead at US$80+, there are still pockets of opportunities in the sector as the Petronas would still invest in operations and maintenance (O&M) and E&P to sustain domestic O&G production,” it said.
UOB Kay Hian Research refined its trough earnings/valuation to be more stringent, using a sector average during the 2009 global financial crisis and assume notional sustainable earnings - a percentage of (ranges between 50%-75%, depending on the business model) that companies can realistically
(100% probability for this bit) meet versus its 2016 earnings forecast and attach a 40%-60% probability for the remaining earnings.
“Stock differentiation has become even more crucial. We continue to advocate a bottom-up strategy that favours companies with: a) an experienced and dynamic management, b) a resilient business positioned in regional shallow and mid-water depths or a cabotage market that has high barriers to entry, c) clearly-defined company-driven growth, d) good profit margins to cushion a potential industry downturn, e) cash calls that are strategic and EPS-accretive, and f) a healthy ROE. We believe investors will return to stocks that deliver earnings growth amid lower oil prices,” it said.
Key themes that support its investment thesis, include: a) Petronas would still invest in exploration & production (E&P) activities to beef up domestic production, b) more enhanced oil recovery (EOR) initiatives, and c) the development of RAPID and its associated facilities costing US$27b in total to be intact, especially those in which final investment decision (FID) are made.
Key changes to our target price and earnings estimate, include: a) downgrade in earnings – SapuraKencana, Dialog, Uzma and Barakah, and b) downgrade in valuation for prudence – SapuraKencana, Bumi Armada, MMHE, Dialog, Yinson, Uzma, Deleum and Barakah while no changes were made towards MISC and Perisai.
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