Most Malaysian O&G players to benefit from stronger US dollar

Maybank Investment Bank Research expects the stronger US dollar against the ringgit to generally have a positive to neutral impact on oil and gas (O&G) companies except Perdana Petroleum.

It said on Monday most of the O&G companies have manageable gearing and cashflows, which would not impede their ability to service debts for now. 

“Overall, we reiterate our contrarian tactical Overweight stance on the O&G sector. Going into 2015, most of these negatives (sector de-rating, stocks underperformance) have been priced in with limited downside,” it said.

Maybank Research pointed out the market has started to accept the reality of a low oil price environment.

“At current levels, we feel that any downside movement to oil prices is likely to be shallower and cause less panic in the market than it did in 2014.

“The low oil price environment will see market undergo reset mode. Acceleration in the scrapping of old assets is timely and positive to the market. A review of upcoming projects is healthy as capital discipline sets in,” it said.

Maybank Research said capital discipline is being taken more seriously now, which will help push down operating/production costs, alongside Capex cuts.

It pointed out the cutback in shale/ deepwater development (due to high marginal cost of production) is key to rebalancing the oil demand-supply dynamics. These two sources of oil contribute four million bpd to six million bpd of global oil output.

It also said that current net oil surplus is two million bpd. Hence, lowering the surplus would help support oil price.

The research house said based on various estimates, the average break-even cost of US$70 a bbl for shale should cause a progressive decline in production. All the shale producers are highly leveraged and independent.

“Draining of shale operators cashflows over the next 6-12 months would affect productivity. We are beginning to see the effects of this. Multiple permits for shale development have been cancelled.

“Shale producers cutting output or closing down production could signal the start of a recovery to the sector,” it said.

Maybank Research said while it is a challenge to time the recovery of the sector, it sees values emerging from the recent sector de-rating. Some stocks are trading at attractive valuations.

“Some are trading at below trough valuations (Alam Maritim), replacement values (Perdana, Perisai, UMW O&G), their IPO price (Bumi Armada, Icon, MMHE, Barakah, UMW O&G) and book values (Alam, Icon, KNM, Perisai, Wah Seong).

“As risk appetite improves, we expect a re-rating in 2H; investors should thus position for key picks ahead of the recovery,” it said.

It continues to advocate a focus on oil service providers in the production phase, who are less sensitive to oil price movements and capex cuts given their steady, long-term contract exposure.

Producing fields will continue to operate for they need to incur just opex and not capex to sustain brownfield activities.

“Dialog (dedicated tank terminal and re-gas ops), Yinson (FPSO), BArmada (FPSO) and Perdana (brownfield OSVs) are our key tactical BUYs.

“Of these, Dialog is the only Shariah compliant stock (a scarcity premium) while Perdana is an acquisition target. We expect consolidation to set in with several opportunistic M&A potentials, notably in the OSV and FPSO space,” it said.

Maybank Research said the downside risks to 2015 earnings include (i) persistent high volatility in oil price, (ii) sustained low oil price level at sub US$60/bbl, (iii) contract replenishment due to delays, suspension of new projects and (iv) cost overruns and higher opex, just to name a few.

On the US dollar, it said the currency has appreciated by 11% to RM3.56 since crude oil price retreated to a one-year low of US$46 to date, largely in line with its economics team’s regression analysis estimates.

“The economics team also estimates that every US$10/bbl crude oil price change would result in a 6 sen change in the ringgit/US$ exchange rate,” it said.

Its forex team had revised its US$/Ringgit forecast higher to RM3.70 for 1Q15, RM3.58 for 2Q15, RM3.65 for 3Q15 and RM3.50 for 4Q15, averaging RM3.60 for 2015.

“This comes off the back of potential downward revision in crude oil price to US$50 (from US$70) for 2015,” it said.

This story was originally posted by The Star Online.

Adapted from a press release by David Bizley

Published on 19/01/2015

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