hlib research oil & gas · 2020. 7. 21. · oil & gas l sector outlook: 2h20 2 hlib...

Hong Leong Investment Bank Berhad (10209-W)

1 HLIB Research l www.hlebroking.com

21 July 2020

Sector Outlook: 2H20

HLIB Research PP 9484/12/2012 (031413)

Oil & Gas

Low Jin Wu [email protected] (603) 2083 1711

NEUTRAL (Maintain)

Stock Rating

Stock Rating Price Target ARMADA BUY 0.22 0.41 CCM HOLD 1.27 1.34 DAYANG HOLD 1.20 1.22 DIALOG BUY 3.84 4.23 MHB HOLD 0.38 0.37 MISC HOLD 7.90 8.48 PCHEM SELL 6.18 5.35 SAPNRG HOLD 0.09 0.09 VELESTO SELL 0.15 0.12 WASEONG SELL 0.50 0.38

Subdued capex despite expected recovery

We expect crude oil prices to trade sideways from its June average price in

3Q20 (USD43/bbl) on slower demand recovery arising from potential re-

emergence of lockdown measures from Covid-19, which has worsened in

north/south America, Brazil and India. However, we expect the recovery in

demand from countries recovering from Covid-19 (Europe, Middle East and

China) to mitigate the potential lost in demand from severely affected nations.

We believe that the oil market would be closer to its equilibrium in 4Q20

(USD50/bbl) and we expect Brent crude oil to average at USD44/bbl in 2020. We

believe that Petronas would remain conservative on its capex spending and we

expect it to come below its planned capex cuts of 21%. We believe that it is still

not the time to bottom fish for upstream O&G services names. Bumi Armada

(TP: RM0.41; BUY) is our top pick for the sector as we believe it is relatively

insulated from the volatility and fluctuations in oil prices and capex spending

from oil majors.

Production cuts to continue into 3Q. We believe that OPEC+ would continue its

9.7mbpd production cuts target into 3Q20 to support oil prices. While compliance was

only 85% in May and c.90% in June, we believe that OPEC+’s compliance would be

higher going into July and Aug despite its plans to reduce production cuts by 2m to

7.7m bpd from Aug onwards, which would bring the oil market closer to equilibrium.

Furthermore, the decline in US production from the closure of shale rigs would also

act as an impetus for the oil market to reach equilibrium.

Petronas’ 2021 capex cuts. Petronas has announced that it has planned to cut

capex by 21% (c.RM10bn) due to the crash in oil prices as a result of Covid-19 and

we do not rule out the possibility of this going beyond its 21% pledged capex and our

base case assumes a 30% cut. Malaysian O&G services players are predominantly

dependent upon Petronas’ spending for its survival and any capex cuts from Petronas

would directly impact most listed O&G players in Malaysia. We expect fabrication,

engineering works to be deferred, significantly lower utilization for jack-up rigs/OSVs

and deferrals of MCM, HUC and plant turnaround contracts. The majority of these

contracts were previously awarded on an on-call basis and Petronas has the

prerogative to halt or postpone projects if the need arises. We are negative on

companies which are heavily reliant on Petronas’ capex spending as we believe that

Petronas would be conservative on its capex spending at least until 1HFY21 and we

remain neutral to positive on companies less reliant on Petronas’ capex.

Petrochemical products price recovery not enough to warrant an upgrade for

PCHEM. Although we believe that PCHEM is in a better financial position right now

since the recovery in crude oil and polyethylene prices, many product prices are still

down by more than c.20% YTD. We also believe that the Covid-19 pandemic would

still result in subdued demand for most petrochemical products and it has the potential

to exacerbate demand of key products like methanol and paraxylene. We view that

the share price of PCHEM has ran ahead of its near-term fundamentals as most

product prices (except polyethylene and urea) are still significantly below its price at

the start of the year, while PCHEM’s share price has recovered significantly.

Reiterate NEUTRAL. We like (i) Bumi Armada (BUY, TP: RM0.41 based on 10.3x

FY20 EPS) for its stable and strong FPSO earnings contribution (>80% of revenue)

and undemanding valuations and (ii) Dialog (BUY, TP: RM4.23 based on DCF with a

WACC of 7%) for its stable and cash-strong business model as tanker rates are

holding steady. We are negative on oil services companies with a heavy reliance on

Petronas’ capex as we believe that it will be conservative on its capex for FY20.

mailto:[email protected]

Oil & Gas l Sector Outlook: 2H20


2H20 Outlook Brent forecasted to average at USD44/bbl for 2020. We expect Brent crude oil price to trade

higher sequentially on demand recovery stemming from the ease of lockdown measures globally.

However for 3Q20, we expect oil prices to trade sideways from its June average price

(USD41/bbl) on slower demand recovery arising from potential re-emergence of lock-down

measures from Covid-19, which has worsened in north/south America, Brazil and India. While we

believe that OPEC+’s production cuts would continue into 3Q20, we reckon weaker-than-

expected oil demand particularly from the US (25% of global demand) would impede the oil

market’s journey to equilibrium. Overall, we expect demand to recover from most countries which

are in its recovery stage and this will mitigate the potential lost in demand from nations severely

affected by the pandemic. We believe that oil prices would be closer to its equilibrium in 4Q20 and

we expect Brent crude oil to average at USD55/bbl in 2021 as we expect a more balanced oil

market then.

Figure #1 Oil forecast table (average)

Bloomberg, HLIB Research

Figure #2 OPEC planned production cut schedule

OPEC, HLIB Research

Figure #3 Brent and WTI prices


Figure #4 Oil demand and supply table forecast

OPEC MOMR, HLIB Research



Demand recovery to happen sequentially. According to OPEC’s monthly oil report data, the

demand and supply imbalance has never exceeded more than 1m bpd in the last 5 years.

However, since the Covid-19 pandemic, demand fell by a drastic 8.4m bpd from 4Q19 to 1Q20

and another 10.5m bpd in 2Q20, representing a fall in demand of 18.9mpbd from its peak levels in

4Q19 of about 100.8mbpd. This instance is expected to be mitigated by OPEC+’s plans to extend

its 9.7mpd production cuts into July and it could be extended further if demand recovery is weaker

than expected. The oversupply situation is also expected to be mitigated by US’ steep plunge in

production (c.2mbpd) before the pandemic proliferated in the US. World rig count has fallen

considerably from 2019, mainly driven by the fall in US shale rigs due to low oil prices. Total rig

count has fallen by 43% from its peak in 3Q19 and total oil rig count has fallen by about 45%,

representing one of its steepest declines ever.

Figure #5 World oil rig count and crude build

EIA, HLIB Research

We expect the oil market would to reach a level closer to equilibrium in 4Q20 even if OPEC+ were

to increase its production by 2m bpd from Aug onwards as (i) demand from other economies are

expected to pick up from the relaxation of lockdown measures, (ii) OPEC+ is expected to reach a

higher level of compliance for its pledged cuts in 2H20 and (iii) continued production declines from

shale rigs in the US.

While we expect demand to pick-up to pick up in 3Q20 in most nations in-line with IMF’s

expectations, we do not rule out the possibility of demand softening significantly from North and

South America (25% of global demand) as Covid-19 cases there have spiked up profusely over

the last few weeks. We also believe that the recent re-introduction of lockdowns in Beijing and

Australia are potential risks towards the oil market demand as well.

Figure #6 Oil demand and supply balance graph

OPEC MOMR, HLIB Research



On the downside, we believe that oil could average at about USD30-35/bbl in 2HFY20 if

coronavirus spirals out of control once again. Our worst case scenario assumes a re-introduction

of stay lockdown measures for most major affected states in countries severely affected by the

virus. However, we opine that oil demand could surprise on the upside if a vaccine is found

sooner-than-expected. With this, countries would be able to accelerate its economic recovery and

hence, elevate oil demand.

US crude oil production might never return to its pre -Covid-19 levels in the foreseeable

future. We believe that US oil production might never return to its 13m bpd production (Feb 2020)

as we believe companies do not have adequate funding to drill new wells even if oil prices were to

rise sharply. Several US shale producers have restarted shut-ins at USD39/bbl WTI price.

According to Enverus and IHIS Market, production would take at least until 2023 to return to its

pre-oil price crash levels. Estimates from Deloitte has also shown that the shale industry booked a

total of USD300bn in net negative cash flow and have written down about USD450bn in invested

capital and has saw more than 190 bankruptcies since 2010. This instance would make banks

more unwilling to fund any shale related acquisitions or investments.

We believe that the fall in US shale rig counts is the primary reason behind the fall in US crude

production. Based on figure #7, the impact of lower US production has been able to reduce crude

build up significantly when Covid-19 became very serious in the US. We believe that the lower

production currently witnessed coming out of the US is here to stay in the near future, which is

one of the reasons why believe that the global oil market could inch closer to an equilibrium in

4QFY20.

Figure #7 US oil rig count and weekly production

Baker Hughes, EIA, HLIB Research



Figure #8 US Ending stocks and crude build up

EIA, HLIB Research

Petronas to take a conservative stance at least until 1H21. Petronas is expected to reduce its

capex spending for the year by 21% from due to the slump in oil prices. Recall that Petronas

previously pledged to spend about RM50bn on capex in 2020 with about RM26-28bn allocated for

domestic capex. We expect Petronas’ capex for the year to stand at about RM35bn instead of the

c.RM40bn which was previously announced in view of the negative outlook in the O&G industry

as fear of Covid-19 mounts.

Of this RM35bn of capex spending, we expect about 60% of it to be spent in Malaysia. With this,

we foresee companies with a huge concentration risks towards Petronas contracts to suffer. We

expect maintenance works umbrella contracts like the Integrated Hook-up and Commissioning (I-

HUC) and the maintenance construction and modification (MCM) works awarded to Dayang and

Serba Dinamik to be deferred until oil prices reaches a higher and more stable level. We also

foresee the postponement of fabrication and engineering works for most production platforms to

be delayed and these delays would continue to plague MMHE and Sapura Energy. We expect

HUC and MCM man-hours to decline by 25-33% in 2020 followed by gradual improvements of

about 5-6% in FY21 from Petronas’ initial targets taken from the Petronas 2020-2022 activity

outlook.

Figure #9 Projected HUC man-hours

Petronas Activity Outlook 2020-2022, HLIB Research



Figure #10 Projected MCM man-hours


Figure #11 Projected Plant turnaround activities


We also foresee a significant reduction in Petronas’ exploration spending as most oil producing

nations are working together to reduce the oversupply situation caused by the Covid-19

pandemic. We foresee a massive reduction in the utilization of Jack-up rigs, Tender-rigs and this

is expected to lead to lower demand for OSVs as they are used largely to mobilise jack-up rigs.

Recall that back in 3QFY16, Velesto Energy had 0 rigs utilized in for a month as Petronas has the

prerogative to not utilize its rigs if need be. While Velesto still has most of its rigs chartered as of

1HFY20, we foresee utilisation decreasing sequentially if oil prices do not recover to a level of

comfort to Petronas. We also expect Sapura’s tender drilling rig segment to suffer as it is

extremely reliant on Petronas to charter its tender-rigs. Tender rigs also tend to fare weaker in

times of low oil prices as they are significantly more expensive than jack-up rigs to charter as the

former are more specialized drilling rigs which can drill more wellheads at deeper depths, more

suitable for large scale specialized exploration drilling. While OSV, which has started to show

signs of recovery in 3QFY19, it has begun to deteriorate in 1QFY20 and is expected to decline

further going forward as the oversupply situation of the OSV segment is expected to be

exacerbated by cuts in the usage of drilling rigs and low oil prices. We believe that jack-up rig and

OSV utilisation could fall as much as 30 to 40% in 2HFY20 as Petronas takes a more

conservative stance in its capex spending.



Recovery in Petrochemical prices are slower than expected despite the recovery in crude

oil prices. Most petrochemical prices have experienced its lowest ever price in more than 10

years when Brent crude oil prices plunged to USD20 in late Apr and many products are still

significantly below its prices in the beginning of the year.

While polyethylene prices have gone through a steeper recovery than that of crude oil prices, we

believe that the Covid-19 pandemic would still result in subdued demand for most petrochemical

products and it has the potential to exacerbate demand further if a second wave of the virus were

to occur. The lower economic activity caused by lockdowns globally has significantly decreased

the demand for the formaldehyde and solvent sectors, which make up the bulk of methanol

(c.50% of F&M revenue) consumption.

Figure #12 Polyethylene prices


Figure #13 Methanol and Urea prices




Figure #14 PCHEM’s share price performance (RM)


On a more positive note, we believe that PCHEM’s fixed ethane supply contract with Petronas is

in a better position now due to the recent recovery in crude oil prices, as the percentage increase

in naphtha prices (feedstock for naphtha based crackers) have been significantly steeper than

other product prices. Recall that when oil prices dipped significantly back in Apr and May, PCHEM

went through a significant share price plunge due to the implied contraction in margins relative to

naphtha players. This was because the plunge in naphtha prices were significantly steeper than

most product prices, giving naphtha based petrochemical players higher margins while PCHEM

suffers from lower margins due to lower product prices as its feedstock cost is fixed. However,

PCHEM is expected to go through a similar situation if oil prices were to crash again.

Figure #15 YTD relative performance of petrochemical product prices to PCHEM’s share price


While we believe that we would be able to see improvements in PCHEM’s profits through the

recovery of product prices in tandem with the recovery in oil prices, we believe that PCHEM’s

share price has run above its fundamentals as most product prices are still more than c.20% down

from its price at the start of the year.

Reiterate NEUTRAL. With 2 BUY calls, 5 HOLD calls and 3 SELL calls, we are maintaining our

NEUTRAL call on the sector. We have cut earnings for most companies which would be materially

affected by Petronas’ capex cuts. Our top pick is Bumi Armada (BUY, TP of RM0.41 based on

10.3x FY20 EPS which is -1.75SD below Yinson’s 3 year mean P/E); we believe that Bumi

Armada would not be materially affected by the volatility in the oil market and the stock is also



currently trading below 5x FY20/FY21 EPS. Bumi Armada has also resolved its solvency issues,

which was a major concern last year. We also reiterate our BUY call on Dialog (BUY, TP of

RM4.23 based on SOP valuation) due to its improving prospects from the expansion of its

terminal business. We believe that it is still not the time to bottom fish for upstream services

names as the outlook for these players remain tepid despite huge declines in most of its share

prices.

Figure #16 Change in rating

HLIB Research

Stock Ratings

Buy Ratings

Bumi Armada. We upgrade Bumi Armada from Hold to BUY at a TP of RM0.41 based on 10.3x

FY20 EPS (-1.75SD below Yinson’s 3 year average PE) as we believe that the company is

undervalued, trading at <5x FY20 EPS. Bumi Armada has experienced sequential improvements

in its quarterly core net profit, driven mainly by its improving FPSO segment. Recall that Bumi

Armada has gone through a myriad of issues with its FPSO Kraken from the end of FY18 until

1QFY19. However, Bumi Armada has since resolved its technical issues with Kraken and it has

been a significant contributor towards FPSO earnings. We believe that Bumi Armada is also in a

much better financial position despite net gearing standing at 2.9x (due to its massive impairment

exercises) as interest cover, net debt/EBITDA ratios and repayment schedules have all improved

significantly based on 1QFY20 numbers.

Dialog Group. We maintain our BUY rating on Dialog, upgrading our SOP-derived TP from

RM3.87 previously to RM4.23 on improving prospects from its expansion of its terminal business

and we increase our earnings assumption by 2/2/2% for FY20-22F. We believe that its steady

storage rates are expected to hold amidst the volatility in the oil market. Its expansion plans for its

tanker business is also on track and it has ample land for future expansions. Its Pengerang

Deepwater Terminal (PDT) facility expansions are expected to drive earnings going forward.

Hold Ratings

MISC. We downgrade our Buy rating for MISC to HOLD at a SOP derived TP of RM8.48 (from

RM8.98), ascribing a lower PB multiple for its tanker segment from (2x to 1.75x) in view of lower

tanker demand in 2HFY20 from the recovery of oil demand; note that freight rates fell sharply in

June 2020. We have also imputed our previously revised TP for MMHE into our valuations. We

cut FY20-21F earnings by 5/2% respectively to factor in lower freight charter rates as we expect

demand and supply of the oil market to balance out in late 4QFY20 and FY21. Most tanker rates

have normalized MoM from its April highs and we believe that this trend is expected to continue

into 2HFY20.



Figure #17 Vessel charter rates

MISC

Malaysian Marine and Heavy Engineering (MMHE). We cut our earnings forecast by 47/38/27%

for FY20-22 in view of the volatile oil market and Petronas’ lower capex spending targets. We

believe that fabricators like MMHE would go through tougher times with regards to vessel orders.

We foresee postponements or deferrals of most of its work orders due to cuts in capex from most

oil majors including its biggest customer Petronas. Nonetheless, we upgrade our Sell rating to

HOLD with an unchanged TP of RM0.37 based on 0.25x BV in view of the recent decline in its

share price.

Sapura Energy. We maintain our HOLD call for Sapura Energy at a TP of RM0.09 based on 0.2x

FY20 P/B (>-1SD below 5 year mean). We believe Sapura would end the year in the red despite

its improved 1QFY20 performance as we expect a contraction of margins to happen in view of the

volatile and uncertain oil market. We also believe that its weak interest coverage ratio of 1.2x and

imminent required principal repayments of its short-term debt are major causes of concern.

Sapura’s stronger net lifting from its SK408 field is expected to mitigate any short-comings

stemming from a margin contraction from its E&C and drilling division.

Chemical Company of Malaysia (CCM). We maintain our HOLD rating on CCM at a TP of

RM1.34 based on 12x FY20 EPS in view of soft caustic soda price as demand for the pulp and

alumina industry is expected to remain tepid due to the Covid-19 pandemic. However, we believe

that its (i) PGW1 reactivation (commercial operations commencement in 2Q20) with +50% volume

increases YoY, (ii) higher demand from gloves for polymers and chlorine, (iii) higher overall

demand for chemicals resulting from the increased demand for hygiene products will help mitigate

the downside risks arising from lower caustic soda prices, which makes up c.15% of revenue and

net profit.

Dayang Enterprise. We maintain our HOLD call for Dayang at a TP of RM1.22 based on 9x

FY20 EPS leaving our earnings assumptions unchanged. We foresee challenging times ahead for

Dayang in FY20 and FY21 due to Petronas’ plans to cut capex by 21% in FY20. We believe that

the pledged capex cuts would negatively affect its PM-MCM and I-HUC contracts, which

constitutes about 75% of its c.RM4bn orderbook. We expect Petronas to defer c.15% of its

planned PM-MCM and I-HUC works slated for FY20. We believe that Dayang is fairly valued at

this juncture as its share price has plunged by significantly from its YTD peak.

Sell Calls

Petronas Chemicals (PCHEM). We maintain our SELL rating on PCHEM but at a higher TP of

RM5.35 (previously RM4.10) based on a higher FY20 EV/EBTIDA multiple of 8x (6x previously)

as we believe that the expected completion of the Pengerang Refining and Petrochemical

complex (PRefCHEM), the recovery in the overall economy and petrochemical product prices will

lift its EV/EBITDA multiple up. We have also upgraded earnings by 9% for FY20, while leaving our



FY21-22f earnings unchanged in view of the faster than expected recovery in petrochemical

product prices arising from the recovery in crude oil prices. We expect 2QFY20 to be its weakest

quarter for the year as petrochemical product prices were at its lowest in 2QFY20 and we expect

sequential improvements in the following quarters. While we expect a slight improvement in

profitability for PCHEM, we believe that PCHEM’s share price has surpassed its fundamentals as

it has risen significantly faster than most of its product prices. Only polymer and urea has offset its

YTD plunge in prices, while most products are still about c.20% down YTD.

Velesto Energy. We downgrade Velesto from a Hold (TP: RM0.18, based on 0.5x FY20 book

value) to SELL at a TP of RM0.12 based on 0.35x FY20 BV which is -1.2SD below its 5 year

historical mean on weaker utilization stemming from Petronas’ decision to cut capex. We believe

that exploration drilling would be among the first to suffer from Petronas’ lower capex spending.

Hence, we cut Velesto Energy ’s earnings by RM63/97/5m for FY20-22F as we trim down our

blended utilization rate assumptions from c.70% to 60% for FY20 and for FY21 from c.80% to

50%. Assuming no renewal of contract extensions, Velesto Energy would be left with 3 chartered

rigs in 3QFY20 and only 2 chartered rigs in 4QFY20. We have assumed that Velesto will be able

to secure several 6 to 9 months contract next year to bring its total average utilization to 50% in

FY21 and we expect daily charter rates to remain flat at about US$70,000/day.

Figure #18 Sensitivity table analysis for Velesto Energy

HLIB Research

Wah Seong Corporation. We maintain our SELL rating on Wah Seong with a lower TP of

RM0.38 based on a 0.3x or 70% discount to end FY19 BVPS of RM1.27 from our RM0.57 TP

previously based on 8x FY21 EPS. We believe Wah Seong’s heavy reliance on its pipe coating

division will not bode well for them in the current oil market environment as its specialization in

pipe coating is too niche to prosper in the oil & gas industry. The performance of Wah Seong is

heavily dependent upon capital expenditures from oil majors and we expect most oil majors to cut

capex by 20% or more. We opine that its recently secured North Field Production Sustainability

(NFPS) project, which is expected to constitute most of its future earnings, could be delayed

beyond 2021 due to the uncertainty in the oil market amidst the Covid-19 pandemic. Hence, we

increased our net loss assumption for Wah Seong in FY20 by 82% and cut our net earnings

assumption for FY21-22F by 67/37% respectively.

Figure #19 Peers comparison

Stock Mkt Cap (RM m)

Price (RM)

Target (RM)

Rating FYE P/E (x) P/B (x) Yield (%)

FY20 FY21 FY20 FY21 FY20 FY21

ARMADA 1,295 0.22 0.41 BUY DEC 4.4 4.1 0.4 0.3 0.0% 0.0%

CCM 212 1.27 1.34 HOLD DEC 11.1 10.4 0.6 0.6 4.5% 4.8%

DAYANG 1,389 1.20 1.22 HOLD DEC 10.0 8.5 0.7 0.7 0.0% 0.0%

DIALOG 21,651 3.84 4.23 BUY JUN 39.6 35.4 5.6 5.1 1.1% 1.3%

MHB 608 0.38 0.37 HOLD DEC 42.8 24.9 0.3 0.3 7.9% 7.9%

MISC 35,264 7.90 8.48 HOLD DEC 18.5 18.0 1.0 1.0 3.8% 3.8%

PCHEM 49,440 6.18 5.35 SELL DEC 25.8 20.1 1.7 1.6 2.0% 2.6%

SAPNRG 1,438 0.09 0.09 HOLD JAN nm nm 0.1 0.1 0.0% 0.0%

VELESTO 1,191 0.15 0.12 SELL DEC nm nm 0.4 0.4 0.0% 0.0%

WASEONG 383 0.50 0.38 SELL DEC nm 20.9 0.4 0.4 0.0% 0.0%

Note: For non-Dec FYE, refers to FY21-22. HLIB Research

Bumi Armada l Sector Outlook: 2H20


HLIB Research PP 9484/12/2012 (031413)

Bumi Armada

Low Jin Wu [email protected] (603) 2083 1711

BUY (Maintain)

Target Price: RM0.41

Previously: RM0.24

Current Price: RM0.22

Capital upside 86.4% Div idend y ield 0.0% Expected total return 86.4%

Sector coverage: O&G

Company description: Armada is an international

offshore serv ices prov ider to the oil & gas industry

in Malaysia and other countries in Asia.

Share price

Historical return (% ) 1M 3M 12M Absolute -8.3 25.7 -4.3 Relative -13.0 11.9 -0.1

Stock information Bloomberg ticker BAB MK Bursa code 5210 Issued shares (m) 5,886 Market capitalisation (RM m) 1,295 3-mth average volume (‘000) 1,042,979 SC Shariah compliant No

Major shareholders Objektif Bersatu Sdn Bhd 34.8% Amanah Saham Nasional Bhd 11.7% Hong Leong Co Malaysia Bhd 4.0%

Earnings summary FYE (Dec) FY19 FY20f FY21f PATMI - core (RM m) 281.2 295.0 315.3 EPS - core (sen) 4.8 5.0 5.4 P/E (x) 4.4 4.2 3.9

Flourishing through the pandemic

We upgrade Bumi Armada from Hold to BUY at a TP of RM0.41 based on 10.3x

FY20 EPS as we believe that the Company is currently undervalued, trading at

<5x FY20/21 EPS. Bumi Armada has experienced sequential improvements in its

quarterly core net profit, driven mainly by its improving FPSO segment. Recall

that Bumi Armada has gone through a myriad of issues with its FPSO Kraken

from 2H18 until 1QFY19. However, Bumi Armada has since resolved its

technical issues with Kraken and it has been a significant contributor towards

FPSO earnings. We believe that Bumi Armada is also in a much better financial

position despite net gearing standing at 2.9x as of 1QFY20 as interest cover, net

debt/EBITDA ratios and repayment schedules have all improved significantly.

Financial position. We believe that Bumi Armada is in a much better financial

position now as compared to FY18 and FY19 despite net gearing ratios increasing to

2.9x in 1QFY20. We believe that the rise in net gearing is particularly attributable to

impairments done on its OSV assets, which we estimate has been impaired by more

than 90% of its acquisition cost value. Bumi Armada has improved on its interest

cover from <2x in 2Q19 to c.3x in 1Q20 and it has also paid and refinanced a

significant portion of its short-term debt, and its core profit is expected to remain

steady with strong earnings coming from its FPSO business. We believe default and

liquidity risk is not a concern for Bumi Armada at this juncture.

Debt Repayment Schedule. Bumi Armada has refinanced most of its short-term debt

into long term debt in 3QFY19 and the company is in a relatively stronger position vs

2H18. As of 1QFY20, only 18 %of its total debt is short -term and 90% of it is ring

fenced to its FPSO vessels. Also c.50% of its long-term debt is also ring fenced to the

cash flow of its FPSO vessels.

Termination Risk. We believe that termination risk for its major FPSO contracts

(Kraken and Olambendo) are very minimal as (i) the owner of Olambendo is ENI, one

of the largest O&G players in the world with a good track record in honouring its

contracts and (ii) Kraken has been one of the best performing asset for EnQuest. We

believe that in the worst case scenario event where an FPSO has to be terminated by

EnQuest, Kraken will be the last in the pecking order. EnQuest currently has two

FPSOs in the North Sea, Kraken and Magnus, whereby the former has significantly

outperformed the latter over the last few quarters.

FPSO Segment Outlook. We expect Bumi Armada's earnings to be driven

significantly by the consistently strong performance of its FPSO business. Olambendo

should continue to contribute significantly to profits while the Kraken asset is an

impetus towards forward earnings. Also, Bumi Armada's FPSO contract values are

not linked to the fluctuations in oil prices and we can expect earnings to hold steady

even if the oil market starts to retrace again.

OMS Segment Outlook. We believe that the OMS segment will decline in the

quarters to come as Petronas starts reducing its domestic capex. Bumi Armada is

almost a hundred percent reliant on Petronas for its OSV business, with 13 out of 30

of its OSV currently chartered under Petronas. We believe that the utilisation for its

OSVs are expected to decline sequentially in the quarters to come. On a more

positive note, we believe that its OSV segment has already went through huge

impairments and is expected to experience significantly lower depreciation. The

retiring of unutilised vessels would also save cost for the Company. We also expect

Armada Installer to remain idle due to the volatile oil market and the underlying global

economic uncertainty. Overall, we expect OMS segment to perform weaker in the

coming quarters but we have already factored this scenario into our valuation of the

Company and the OMS segment’s profit contribution has been negligible over the

course of FY19.

Forecast. We maintain our FY20-22F earnings assumption. Our earnings assumption

mailto:[email protected]



assumes a CAGR of 4% from FY19-22F.

.

Upgrade to BUY, TP: RM0.41. We upgrade Bumi. Armada from a HOLD (TP,

RM0.24) to a BUY based on 10.3x FY21F EPS (-1.75SD from Yinson’s 3 year

historical mean P/E), changing our SOP-based valuation method to P/E. We believe

that Yinson is a valid comparison as both companies’ earnings are predominantly

attributable to FPSOs and both companies are currently trading at a s imilar net

gearing ratio. Our -1.75SD assumption is premised upon Bumi Armada’s lower growth

prospects as its current focus is to stream line its assets instead of going for growth.

Bumi Armada is currently trading at <5x FY20 EPS while Yinson is currently trading at

about 17x FY20EPS.

Figure #20 Solvency Ratios

Company, HLIB Research

Figure #21 Total debt and breakdown


Figure #22 Net debt/EBITDA ratio




Figure #23 Bumi Armada and Yinson’s relative share price and core net profit

performance comparison




Financial Forecast

All items in (RM m) unless otherwise stated

Balance Sheet Income Statement

FYE Dec FY18 FY19 FY20f FY21f FY22f FYE Dec FY18 FY19 FY20f FY21f FY22f

Cash 1,226.4 1,103.8 1,426.5 2,167.5 3,022.1 Revenue 2,418.7 2,070.7 2,099.8 2,068.4 2,067.1

Receivables 5,767.1 5,206.6 5,406.8 5,397.6 5,397.2 EBITDA 801.3 930.6 1,448.4 1,469.0 1,502.7

Inventories 7.3 5.6 21.1 20.8 20.7 EBIT 301.9 490.1 690.0 703.5 730.3

PPE 6,692.7 5,940.6 5,321.7 4,696.0 4,063.4 Finance cost (522.1) 555.5 490.4 483.5 478.0

Others 1,847.2 1,722.6 1,722.6 1,722.6 1,722.6 Associates & JV 166.2 147.6 186.3 192.4 160.8

Assets 15,540.7 13,979.2 13,898.7 14,004.4 14,226.0 Profit before tax (2,296.9) 82.2 385.8 412.4 413.1

Tax 22.3 44.0 (88.7) (94.9) (95.0)

Payables 1,056.4 548.1 644.9 635.3 639.1 Net profit (2,319.1) 38.2 297.1 317.6 318.1

Debt 10,380.5 9,490.7 8,990.7 8,790.7 8,690.7 Minority interest (16.4) 0.3 2.1 2.2 2.2

Others 733.6 727.3 727.3 727.3 727.3 Core PATMI 228.1 281.2 295.0 315.3 315.8

Liabilities 12,170.6 10,766.0 10,362.9 10,153.3 10,057.0 Exceptionals - - - - -

Reported PATMI (2,302.8) 352.9 295.0 315.3 315.8

Shareholder's equity 3,363.2 3,227.0 3,514.0 3,829.3 4,146.1

Minority interest 6.9 (13.9) 21.9 21.9 22.9 Consensus core PATMI 286.8 287.9 292.2

Equity 3,370.1 3,213.1 3,535.8 3,851.1 4,169.0 HLIB/ Consensus 1.0 1.1 1.1

Cash Flow Statement Valuation & Ratios

FYE Dec FY18 FY19 FY20f FY21f FY22f FYE Dec FY18 FY19 FY20f FY21f FY22f

Profit before taxation (2,296.9) 82.2 385.8 412.4 413.1 Core EPS (sen) 3.9 4.8 5.0 5.4 5.4

D&A 499.4 440.5 758.5 765.5 772.5 P/E (x) 5.7 4.6 4.4 4.1 4.1

Working capital 552.8 152.8 (118.8) (0.1) 4.1 EV/EBITDA (x) 13.3 10.3 6.1 5.4 4.6

Taxation 22.3 44.0 (88.7) (94.9) (95.0) DPS (sen) - - - - -

Others 2,289.8 14.8 (2.1) (2.2) (2.2) Dividend yield - - - - -

CFO 1,067.4 734.3 934.7 1,080.7 1,092.4 BVPS (RM) 0.6 0.6 0.6 0.7 0.7

P/B (x) 0.4 0.4 0.4 0.3 0.3

Capex (534.3) (104.6) (139.6) (139.7) (139.8)

Others 178.4 61.1 - - - EBITDA margin 33.1 44.9 69.0 71.0 72.7

CFI (355.9) (43.5) (139.6) (139.7) (139.8) EBIT margin 37.7 52.7 47.6 47.9 48.6

PBT margin (95.0) 4.0 18.4 19.9 20.0

Changes in debt (1,367.0) (807.6) (500.0) (200.0) (100.0) Net margin 9.4 13.6 14.0 15.2 15.3

Shares issued - - - - -

Dividends - - - - - ROE 6.8 8.7 8.4 8.2 7.6

Others - (5.9) 27.7 - 2.0 ROA 1.5 2.0 2.1 2.3 2.2

CFF (1,367.0) (813.5) (472.3) (200.0) (98.0) Net gearing 271.6 261.3 214.2 172.2 136.2

Net cash flow (655.5) (122.7) 322.8 741.0 854.6 Assumptions

Forex - - - - 1.0 FYE Dec FY18 FY19 FY20f FY21f FY22f

Others 35.8 - - - 1.0 Growth (%)

Beginning cash 1,846.1 1,226.4 1,103.8 1,426.5 2,167.5 Sales Growth 0.7 (14.4) 1.4 (1.5) (0.1)

Ending cash 1,226.4 1,103.8 1,426.5 2,167.5 3,022.1 EBITDA Growth (39.9) 16.1 55.6 1.4 2.3

EBIT Growth (60.2) 62.3 40.8 2.0 3.8

PBT Growth (566.6) (103.6) 369.5 6.9 0.2

Core PATMI Growth (24.2) 23.3 4.9 6.9 0.2

Hong Leong Investment Bank Berhad (10209-W) l Sector Outlook: 2H20


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Stock rating definitions

BUY Expected absolute return of +10% or more over the next 12 months.

HOLD Expected absolute return of -10% to +15% over the next 12 months.

SELL Expected absolute return of -10% or less over the next 12 months.

UNDER REVIEW Rating on the stock is temporarily under rev iew which may or may not result to a change from the prev ious rating.

NOT RATED Stock is not or no longer within regular coverage.

Sector rating definitions

OVERWEIGHT Sector expected to outperform the market over the next 12 months.

NEUTRAL Sector expected to perform in-line with the market over the next 12 months.

UNDERWEIGHT Sector expected to underperform the market over the next 12 months.

The stock rating guide as stipulated above serves as a guiding principle to stock ratings. However, apart from the abovementioned quantitative definitions, other qualitative

measures and situational aspects will also be considered when arriv ing at the final stock rating. Stock rating may also be affected by the market capitalisation of the indiv idual

stock under rev iew.

hlib research oil & gas · 2020. 7. 21. · oil & gas l sector outlook: 2h20 2 hlib...

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