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Monday, December 22, 2014

Is it time to take another look at oil and gas counters? - thestar

SOME oil and gas stocks are seeing fresh investor interest this week on the back of global oil prices consolidating at about US$60 per barrel.
This is not surprising as the carnage of oil and gas stocks in the last three weeks has seen some counters trading at single-digit forward price-to-earnings ratio (P/E).
These include counters such as Wah Seong Corp Bhd, SapuraKencana Petroleum Bhd, Perdana Petroleum Bhd, Uzma Bhd and Alam Maritim Resources Bhd.
It is anyone’s guess whether oil prices will remain at current low levels or slide down further in the coming months.
“Personally, I think that US$50 per barrel is acceptable in investors’ minds now. If it goes below US$50, then that could be another reason to be fearful of O&G stocks,” says UOB KayHian analyst Danny Chan.
He opines that the decline in oil prices, which are 46% down year-to-date, have more or less been priced in for most O&G counters.
The global benchmark Brent was trading at US$60.45 yesterday while the US West Texas Intermediate (WTI) traded at US$55.02.
Chan notes that should oil prices stay low for a long time, available jobs would become fewer.
“Hence, there are very few chances for stocks to re-rate at 12 to 16 times P/E towards bull market kind of valuations,” he says.
However, he says there are pockets of opportunities for some companies, adding that Bumi Armada Bhd’s earnings visibility is quite good.
For small and medium-cap companies, he favours Deleum Bhd and Uzma Bhd as they fall within Petroliam Nasional Bhd’s (Petronas) operational expenditure coupled with strong balance sheet.
“We think these three companies will be quite resilient with their earnings,” he says.
Uzma’s share price fell 61.6% to RM1.59 yesterday from its peak of RM4.22 on July 7, 2014. Meanwhile, Deleum’s share price dropped 36% to RM1.68 from RM2.58 from its peak on April 4, 2014.
Chan adds that he is more concerned about SapuraKencana Petroleum Bhd as 10% to 15% of its earnings are directly exposed to exploration and production (E&P).
In addition, he says, it has relatively higher gearing of 1.3 times.
Maintaining a “tactical overweight” call on the O&G sector, he says that oil prices should firm up in winter.
However, based on conservative earnings assumption and trough analysis, UOB KayHian’s preferred picks are SapuraKencana, Bumi Armada, Barakah Offshore Petroleum Bhd, Uzma and Deleum.
SapuraKencana, Uzma, Deleum and Barakah Offshore are pegged at a trough P/E of eight times assuming at least 80% of its current 2015 and 2016 earnings are achievable.
Chan observes that contractors and service providers will have to readjust their business models and operations to cope with the current ‘survival of the fittest’ market.
This is because Petronas and international oil companies are moving to cut their E&P budgets and focusing on selected projects, thereby intensifying competition in businesses such as drilling rigs, offshore support vessels and fabrication.
“Within the O&G value chain, we have least preference for engineering, procurement and construction (EPC) contractors (fabricators), offshore support vessel owners especially heavily-geared ones and drilling rig owners (especially those exposed to exploration drilling),” he says.
In a risk assessment exercise conducted by UOB KayHian, it found that offshore contractor SapuraKencana had the lowest average score (5.0 out of 10) despite its high earnings sustainability and attractive valuations.
This was because it had low balance sheet strength and high foreign shareholding.
Meanwhile, Deleum scored the highest (7.6 out of 10) due to its high earnings sustainability, strong balance sheet, high valuation attractiveness and low foreign shareholding.
UOB KayHian, which assessed 10 stocks under its coverage, looked at four key considerations, namely three-year earnings sustainability, balance sheet strength, valuation vis-a-vis regional peers and foreign shareholding.
Perisai Petroleum Teknologi Bhd scored 5.4, with low earnings sustainability, low balance sheet strength and moderate foreign shareholding.
Interestingly, it was rated high for valuation attractiveness despite its earnings being dragged down by two of its currently idle assets, the Rubicone and derrick pipe-lay barge, Enterprise 3.
Chan says the high rating is because Perisai stands to enjoy quite a big earnings swing if the two assets manage to secure charters.
“It’s attractive because returns will be substantial but it’s a bit of gamble if they don’t get the contracts next year. However, management has indicated it is quite hopeful that a contract will be secured in the first quarter of next year,” he says.
He says that it is surprising to observe that Malaysia’s O&G counters are no longer trading at a premium to regional peers, as they normally trade at around 15% to 20% premium.
“But in the current oil crash, the premium has been wiped out. Additionally, some counters are trading at discounted valuations to regional peers,” he says.
Another analyst noted that with oil prices being so uncertain at this juncture, it was very difficult to say whether investors should be accumulating significantly.
She says that Petronas has given a clear indication that its capex will be lower in 2015, implying that new contract flow will be less robust than in the past two years.
She says there was a record amount of contracts awarded in the past two years and expects it to fizzle out in 2015 except for the Pengerang Refinery and Petrochemical Integrated Development (Rapid) project.
“Besides the smaller quantity of contracts, there will also be an emphasis on costs, therefore recipients of new contracts may not be as profitable as they were previously,” she says.
She notes that if oil production companies are cutting back on capital expenditure, one of the first few items to cut or delay are big ticket items such as new fabrication and FPSO contracts.
She says new exploration plans in the deepwater areas could also be pushed back and this would affect deepwater rigs.
“In the offshore asset market, drilling rig owners and offshore support vessel (OSV) owners are also hit because of less offshore activity and because oil production companies look to cutting costs,” she says, adding that one of the ways is to push down charter rates for assets like OSVs.
The analyst says that if crude remains stable, she sees a quiet first half for 2015, with slow offshore contract activity.
Companies with firm order books are expected to report earnings within expectations while those without will see a sharp drop in earnings.
However, she says that if crude declines further, it should be a temporary situation.
“This is because there will be a drop in supplies with crude dipping below break-even costs of many producers. The lower supply will push crude oil prices upwards back to equilibrium,” she says.

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