Sector Update BIMB Securities Research 7 January, 2021 A Member of BIMB Holdings Group PP16795/03/2013(031743) |Oil and Gas Equity Oil and Gas upstream outlook Overweight▲ On recovery path Possible lower-for-longer oil price scenario prompted Petronas to delay marginal field development. Nonetheless, the outlook for mid-to-large sized field development remains constructive as oil stabilizes above USD40/bbl, in our view. We forecast Brent to trade at an average of USD45/bbl in 2021. We are optimistic with recovery in offshore projects as we expect Petronas to allocate more capital towards upstream segment following completion of its downstream project. We upgrade our sector recommendation on upstream to OVERWEIGHT (from NEUTRAL) as we foresee a recovery in offshore development projects in near future. At current price, we believe the upside potential outweighs the risk. Resumption in new offshore development projects Despite pessimism over Petronas’ capex cut, we believe the worst is over for Malaysia’s upstream segment as we think under-investment in prior years will ensure a steady number of projects maturing within next 3 years. In addition, we believe Petronas’ effort in high-grading its development strategy to favour mid-to- large sized fields will reduce the possibility of further delay in new field development projects. Despite higher dividend payment to government, we think the completion of Petronas’ downstream project (i.e. Pengerang Integrated Complex) which is worth c.RM100bn will lead to higher allocation towards upstream projects. Riding on recovery theme Overall, there are 11 projects now under execution and 19 new projects already approved to be sanctioned over the next 3 years. On top of that, there are also 25 projects that are at pre-FID stage currently. We believe this should continue to support revenue visibility for fabricators in the medium term. Meanwhile, Petronas projects that it would require 7-10 jack-up rig (JUR) annually over the next 3 years, which is close to 5-year average (8.5 units), based on our estimate. This is higher than typical downcycle demand level, as higher demand for development well drilling is required currently (after the completion of HUC activity) before first oil/gas to be produced. Furthermore, 8 out of 11 on-going projects are expected to be completed this year which should also support jack-up rig utilisation. As such, we think both fabricators (MMHE) and jack-up rig operator (Velesto) are on track to see recovery in business activities and revenue for FY21 and FY22. Change in earnings forecast With expectation of stable demand for JUR, we raised Velesto’s FY21/22F utilisation rate assumption to 70%/67% (from 60%/60%) which brings us to reduce our earlier net loss forecast by 53%/60% respectively. OVERWEIGHT on Upstream services We upgrade our sector recommendation on upstream to OVERWEIGHT from NEUTRAL. We upgrade Velesto to BUY (from HOLD) with higher TP of RM0.265 on steady demand for jack-up rig in next 3 years. We also maintain our BUY call on MMHE with higher TP to RM0.77 given the recovery path in offshore projects. Azim Faris Ab Rahim, CFA [email protected](603) 2613 1734
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Sect
or
Up
dat
e
BIMB Securities Research
7 January, 2021 A Member of BIMB Holdings Group
PP16795/03/2013(031743) |1
Oil
and
Gas
Eq
uit
y
Oil and Gas upstream outlook
Overweight▲
On recovery path
Possible lower-for-longer oil price scenario prompted Petronas to delay
marginal field development. Nonetheless, the outlook for mid-to-large sized
field development remains constructive as oil stabilizes above USD40/bbl, in
our view. We forecast Brent to trade at an average of USD45/bbl in 2021.
We are optimistic with recovery in offshore projects as we expect Petronas to
allocate more capital towards upstream segment following completion of its
downstream project.
We upgrade our sector recommendation on upstream to OVERWEIGHT (from
NEUTRAL) as we foresee a recovery in offshore development projects in near
future. At current price, we believe the upside potential outweighs the risk.
Resumption in new offshore development projects
Despite pessimism over Petronas’ capex cut, we believe the worst is over for
Malaysia’s upstream segment as we think under-investment in prior years will
ensure a steady number of projects maturing within next 3 years. In addition, we
believe Petronas’ effort in high-grading its development strategy to favour mid-to-
large sized fields will reduce the possibility of further delay in new field development
projects. Despite higher dividend payment to government, we think the completion
of Petronas’ downstream project (i.e. Pengerang Integrated Complex) which is worth
c.RM100bn will lead to higher allocation towards upstream projects.
Riding on recovery theme
Overall, there are 11 projects now under execution and 19 new projects already
approved to be sanctioned over the next 3 years. On top of that, there are also 25
projects that are at pre-FID stage currently. We believe this should continue to
support revenue visibility for fabricators in the medium term. Meanwhile, Petronas
projects that it would require 7-10 jack-up rig (JUR) annually over the next 3 years,
which is close to 5-year average (8.5 units), based on our estimate. This is higher
than typical downcycle demand level, as higher demand for development well
drilling is required currently (after the completion of HUC activity) before first oil/gas
to be produced. Furthermore, 8 out of 11 on-going projects are expected to be
completed this year which should also support jack-up rig utilisation. As such, we
think both fabricators (MMHE) and jack-up rig operator (Velesto) are on track to see
recovery in business activities and revenue for FY21 and FY22.
Change in earnings forecast
With expectation of stable demand for JUR, we raised Velesto’s FY21/22F utilisation
rate assumption to 70%/67% (from 60%/60%) which brings us to reduce our earlier
net loss forecast by 53%/60% respectively.
OVERWEIGHT on Upstream services
We upgrade our sector recommendation on upstream to OVERWEIGHT from
NEUTRAL. We upgrade Velesto to BUY (from HOLD) with higher TP of RM0.265 on
steady demand for jack-up rig in next 3 years. We also maintain our BUY call on
MMHE with higher TP to RM0.77 given the recovery path in offshore projects.