AmWatch - Oil & Gas Sector : Slow near-term project rollout outlook NEUTRAL, 14 Oct 2014

SECTOR FOCUS OF THE DAY

Oil & Gas Sector : Slow near-term project rollout outlook              NEUTRAL

We have downgraded our sector view to NEUTRAL from OVERWEIGHT given the slow rollout of domestic developments, downscaled projects, declining marine charter rates, increasing competition from overseas fabrication players due to the relaxation of local content requirements and deteriorating visibility of regional prospects, especially in Australia’s mega-billion gas field developments. Additionally, there are concerns that the possible replacement of Petronas’ president/CEO Tan Sri Shamsul Abbas next year may lead to further temporary delays in contract awards.

Slower project rollouts and delays in the award of new tenders translate to cuts in O&G players’ revenue prospects in FY15F-FY16 and a higher corresponding impact on earnings leveraged to fixed operating costs. The impact will be more significant for domestic- centric upstream players, as opposed to more globalised operators such as Bumi Armada and SapuraKencana or downstream service providers such as Dialog Group.

Hence, we have downgraded our recommendations for Petronas Gas from BUY to HOLD while maintaining HOLDs for Yinson and Dialog Group. MMHE remains a SELL while our BUYs are Bumi Armada, SapuraKencana and Alam Maritim.

The contract awards to Malaysian O&G players in 3Q2014 fell to only RM711mil from RM8bil previously. For fabricators like MMHE and TH Heavy Engineering, near-term domestic order prospects have deteriorated as our channel checks reveal that out of 4 central processing platforms (CPPs) being proposed or tendered out in Malaysia at the beginning of the year, only the award for the over US$1bil Bergading CPP may materialise by the end of the year.

Globally, there are ongoing revisions in project cost and scale given the increasing cost consciousness by oil majors (and not only Petronas) as crude oil prices have softened even though development costs have escalated over the past  3 years. Additionally, even though Petronas is still likely to ramp up its capital spending post-2015, there will be increased competition from foreign yards as local vendor policies are being relaxed under more complex engineering projects. Hence, while there are still multiple EOR projects in the pipeline involving other CPP projects such as the Kasawari, Sepat, and Guntong fields, visibility for local operators’ chances is unclear.

Others :

IJM Corporation : Not as SILK-Y smooth BUY

NEWS HIGHLIGHTS

Malaysia Airports Holdings : Cautiously optimistic on passengers

Astro Malaysia Holdings : Wins arbitration against AV Asia

Mah Sing Group : RM520mil GDV land deal done

Malaysian Resources Corp : Wins RM197mil job

TSH Resources : To complete Icon Field’s acquisition by mid-2015

Plantation Sector : Malaysia seeking to boost palm oil with tax-free extension

Oil and Gas Sector : Petronas buys Statoil assets for RM7bil

DISCLAIMER:

The information and opinions in this report were prepared by AmResearch Sdn Bhd. The investments discussed or recommended in this report may not be suitable for all investors. This report has been prepared for information purposes only and is not an offer to sell or a solicitation to buy any securities. The directors and employees of AmResearch Sdn Bhd may from time to time have a position in or with the securities mentioned herein. Members of the AmInvestment Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein. The information herein was obtained or derived from sources that we believe are reliable, but while all reasonable care has been taken to ensure that stated facts are accurate and opinions fair and reasonable, we do not represent that it is accurate or complete and it should not be relied upon as such. No liability can be accepted for any loss that may arise from the use of this report. All opinions and estimates included in this report constitute our judgement as of this date and are subject to change without notice.