We maintain our Brent average forecast at USD68/bbl in 2019, on better 2H19 underpinned by compliance of OPEC+ to extend production cut but upside is capped by resilient US production growth and demand uncertainty led by US China trade war. Meanwhile, Petronas capex spending should be intact despite recent credit rating downgrade by Moody’s. We continue to favour upstream maintenance space and reckon that downstream maintenance demand will also pick up following the commissioning of PIC. Reiterate NEUTRAL on the sector.
Maintaining 2019 average Brent forecast at USD68/bbl. Brent crude prices have averaged at USD66/bbl in 1H19 (vs FY18’s average of USD72/bbl) and we are maintaining our full year 2019 average price assumption of USD68/bbl on the back of a slightly stronger 2H19. This is premised on the recently concluded decision by OPEC+ to extend its production cut agreement by another 9 months till end of March next year. However, we believe the upside could be still capped by resilient US production growth of +1.4m bbl/day in FY19 (EIA’s FY19 average forecast at 12.4m bbl/day) and lingering uncertainty arising from the US-China trade war putting pressure to the overall demand growth.
Maintenance space is the bright spot. We are still positive on upstream maintenance players underpinned by continuous work orders awarded by the clients. These players are likely to register stronger earnings both QoQ and YoY in the upcoming 2Q19. Moreover, Petronas is likely to award its RM4.0bn tender, I-HUC (restructured from existing HUC and Topside Major Maintenance contract) earliest by 3Q19. The total tender could worth up to RM4bn and potential beneficiaries are Dayang, Carimin and Petra Energy. On the other hand, according to Petronas Activity Outlook 2019-21, plant turnaround activities are also expected stay robust in the near medium term. Following the award of 5-year agreement for integrated turnaround main mechanical and maintenance mechanical static to 17 local contracts, we expect contract flow for other master service agreement for different maintenance work scope, i.e. maintenance of rotating equipment.
Domestic capex to ramp up in 2H19. On the domestic front, Petronas’ capex spending had a slow start in 1Q19 (-59% QoQ; -31% YoY), accounting only 17% of Petronas targeted full year capex estimate of RM50bn (+7% YoY). While Brent prices are still hovering above USD60/bbl level, which is inline with Petronas crude assumption of USD66/bbl, we reckon that Petronas may not revise its budget. Therefore, we expect overall capex to ramp up in the next few quarters. As of end June, Moody’s has downgraded Petronas’ domestic issuer and foreign currency senior unsecured ratings to A2 from A1 but upgraded the ratings outlook to stable from negative. We are not overly concerned over the potential hike in Petronas’ financing cost subsequent to the credit rating downgrade as Petronas is still able to stomach additional credit cost. However, if the Malaysian government continues to demand lumpy one-off dividends, Petronas would have to cap its spending which will eventually jeopardise its future growth.
Reiterate NEUTRAL. As we believe maintenance players are likely to gain traction within the oil & gas sector, we increased our valuation multiple for Dialog and Dayang by 1-2x P/E in our respective SOP valuation. This is also backed by solid earnings trajectory coupled with strong track records. Post adjustment, Dayang’s cum/ex-TP is increased to RM1.49/RM1.43 assuming higher multiple of 12x (from 10x) for its TMS segment while Dialog’s TP is upped to RM3.87 (from RM3.80) assuming higher multiple of 21x (from 20x) for its core businesses. Keep NEUTRAL view on the sector with gradual improvement within the upstream space.
Source: Hong Leong Investment Bank Research - 8 Jul 2019
https://klse.i3investor.com/blogs/hleresearch/214027.jsp
