Positive outlook for O&G

Business & Markets 2013
Written by BIMB Securities
Thursday, 16 May 2013 09:18
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Oil and gas sector update
Maintain neutral: Recall that we revised our stock universe’s valuations
downwards in October 2012 on the back of higher valuation risk
premium on headline risks related to the general election. Given the
strong contract flows year-to-date (YTD) and the conclusion of the
election, we are now reverting our valuation back to the normalised
mode.
We observe that throughout our “ election adjusted” valuation mode
period, stock prices have largely performed within our calls. As we now
move into the second half of 2013, we note that order book
replenishment for both Bumi Armada Bhd and Malaysia Marine and
Heavy Engineering Holdings Bhd (MHB) remain slow for various tenderspecific
reasons, hence there is a likelihood we could revise our
forecast lower for both companies during the next quarterly earnings
release.
Order book intake, while lower month-on-month in April, was still strong
with RM1.8 billion worth of jobs secured, bringing YTD jobs secured by
listed companies to RM8.3 billion, about 73% of the total figure for
2012.
UMW HOLDINGS BHD [] was the biggest winner for the month with
RM864 million contracts secured for its drilling units, Naga-1 and
Naga-4.
Looking at contracts secured YTD, RM2.3 billion was chemicals supply-related which typically carries a low margin, followed
by RM1.4 billion for fabrication and RM1.1 billion for floating production, storage and offloading (FPSO). We remain optimistic
that 2013 is on track to achieve higher order flow than 2012. Already the RM7 billion to RM10 billion hook-up and
commissioning contract awards have kick-started with the win by DAYANG ENTERPRISE HOLDINGS BHD [] and we expect
more news on this front in the near term.
While the emergence of a special purpose acquisition company (SPAC) with oil and gas (O&G) assets has yet to attract
attention from institutional investors due to a lack of performance record, we see their existence as important in diversifying
investment choices, especially for pure upstream exploration and production plays. Currently there are two such companies
listed on Bursa Malaysia — Hibiscus Petroleum Bhd and Cliq Energy Bhd — and there are another four SPACs focused on
O&G assets at various stages of listing. Another major issue is the risk-related O&G block which most domestic investors are
unfamiliar with, especially for green projects of which the commercial value for development is still undetermined.
Petroliam Nasional Bhd recently issued the pre-qualification documents for the engineering, procurement, CONSTRUCTION []
and commissioning package for its refinery and petrochemical integrated development (Rapid) tank farm. This comes after
the same documents were issued last year for the 1.3 gigawatt power plant and regasification terminal.
Despite the reversion of valuation and the strong YTD contract flows, we remain “neutral” on the sector. As for our calls,
given the strong post election rally, we have a “neutral” call for all companies under our coverage: Bumi Armada (target price:
RM4.32), Dayang (RM4.48), Dialog (RM2.45), MHB (RM4.16), UZMA BHD [] (RM2.32) and Wah Seong Corp Bhd (RM1.82).
— BIMB Securities Research, May 15