Maybank IB remain positive on O&G services

PETALING JAYA: Maybank IB Research has maintained its overweight call on the oil and gas (O&G) services sector following a roadshow in July when it had discussions with fund managers from Malaysia, Singapore and Hong Kong.
"We remain overall positive on the O&G services sector. We like KNM for its direct exposure to Refinery And Petrochemical Integrated Development (Rapid). Securing Rapid projects would lift our earnings and target price by up to 50%. Getting the Peterborough waste-to-energy project off the ground in Q4 2014 could drive further interest and re-rate the stock further," it said in its research note yesterday.
For OSV exposure, its top picks are Perdana Petroleum and Ezion, while UMW OG and Yinson are its top picks for jack-up rigs and FPSOs respectively.
Nam Cheong and Vard are its preferred stocks in shipbuilding while SILK and Coastal Contracts are interesting from the perspective of value and earnings growth potential.
"The Rapid theme generated strong interest in several O&G stocks. Indonesia-centric OSVs (which we have yet to cover) too received attention. However, there were mixed views on the drilling market and our revised valuation methodologies for rig builders, coupled with their order-win momentum," said Maybank IB.
While institutional investors remained keen on the Malaysia-Singapore O&G services sector, they were concerned about rising political tensions in the South China Sea, jack-up oversupply from new rigs entering the market and the rig replacement cycle, and risks associated with the build-to-stock (BTS) model.
"Stock-wise, investors' interests were mainly in Malaysia-listed KNM, Perdana Petroleum and UMW OG, and Singapore-listed Ezion, Nam Cheong and Vard. They were generally receptive of some of our new ideas in Malaysia like SILK and Coastal Contracts. Stocks not under our coverage - Pacific Radiance, PACC Offshore, Ezra, Logindo and Winter mar - were also discussed."
For jack-up rigs, the fundamentals (for shallow water) are strong, with steady day rates, decent utilisation rates and new contracts. Demand is also picking up, with the Philippines and Myanmar emerging as new markets in Southeast Asia and these two countries are expected to award up to 31 exploration blocks and licences in the near future.
In Malaysia, import substitution opportunities are growing with just two out of 16 active jack-ups being Malaysia-owned/operated. In Southeast Asia, 15 out of 65 active jack-ups are old and due for replacement while 45 contracts are due to expire in 2014 and 2015.
"Against this backdrop, operators with the track record and available premium jack-up rigs for charter will be in demand, in our view. Non-contractual risks should be lower except that many Chinese-built speculative rigs will come into the market by 2015/2016," said Maybank IB.
In contrast, deepwater drilling face short-term weakness with charter rates for deepwater floaters drifting lower due to short-term oversupply, which has also affected utilisation rates.
OSV shipbuilders and asset owners/operators are expected to benefit as oil companies shift focus away from exploration towards development and construction, in order to bring offshore oilfields to production while an expected increase in offshore rig counts with peak supply in 2014 and 2015 should also drive demand.
However, Chinese shipbuilding recovery is only expected in 2015 and although the sector has bottomed out with commercial shipbuilding prices turning up, it is still crimped by vessel oversupply and yard overcapacity.
"We fear that the sector could sink back into a downturn if shippers become overzealous and place too many orders."
It maintained its hold call on Yangzijiang and sell call on Cosco Corp.