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Monday, September 25, 2017

Oil and Gas - Start of Oil Bull? Maybe Not

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Highlights

  • Explaining recent oil price rally. Oil price has recovered from US$45/bbl in June to US$56/bbl in mid Sep due to disruptions in US energy market caused by Hurricane Harvey. Severity and duration of outages are still uncertain at this juncture but US refinery runs was down week on week on 1 st Sept 2017, resulting drawdown in US crude inventory. US production was also down by 40,000 bbls/day from July to August.
  • Is this a structural recovery? Market sentiment has improved on the O&G sector given the recent rally in share prices. However, we believe the oil supply disruption is not permanent while fundamentals will revert back to what we expect earlier (still supply surplus). According to EIA, some pipelines are beginning to restart operations and oil producers are starting to ramp up productions, pointing to recovery of production growth in US latest by start of 2018.
  • Oil price target maintained. Ytd Brent oil prices have averaged at US$51.2//bbl. Given that we expect stronger prices in 2H17 due to seasonality, we believe our target of average US$55/bbl remains intact. Recent events (hurricane & supply disruptions) have brought about optimism in the market, but we believe everything will revert back to normal and market will still be oversupplied in 2018.
  • RM5bn MCM contracts to be awarded. As opposed to earlier expectation of Modification, Construction & Maintenance (MCM) contract award by Petronas worth circa RM5bn to be awarded in 2Q17, we believe announcement of contract to be soon (in matter of weeks) as Petronas finalizes the contract split. Major beneficiaries of the contract award consist of Dayang (BUY; TP: RM 1.20), Deleum (Not Rated), Petra Energy (Not Rated) & Sapura Energy (Hold; TP: RM1.59). At this juncture, split of contract award among contractors are unknown but we believe Dayang and Sapura Energy are the contenders for the bigger portion of the contract value due to their superior operational track record.

Risks

  • Further plunge in oil prices.
  • Slower than expected recovery in O&G activities.

Rating

NEUTRAL (  )
  • Call maintained on the sector with oil prices expected to be still range bound. Award of MCM contracts will improve sentiment on the sector but we do not foresee significant structural improvement in the sector and oversupply still persists in the sector.

Valuation

  • Picks:
1. DAYANG (BUY; TP: RM1.42) – on attractive valuation with potential value unlocking corporate exercise expected to refloat Perdana shares.
Source: Hong Leong Investment Bank Research - 25 Sept 2017

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