oil & gas neutral

Sector Update

05 April 2021

PP7004/02/2013(031762) of 9

Oil & Gas NEUTRAL Activity Levels to See Gradual Recovery ↔

By Steven Chan /[email protected]

Brent crude prices have enjoyed a rebound this year underpinned by weather-led supply disruptions and OPEC+’s decision to maintain output cuts. That said, we still see possible downside risks to oil prices (possibly even dipping below the USD60/barrel mark), given: (i) still fragile demand-supply dynamics with full recovery to pre-pandemic levels expected only in 2023, and (ii) inevitability of OPEC increasing productions during the year, given its record low production capacity utilisation. We revised our 2020 average Brent crude assumption to USD60/barrel (from USD50/barrel), while introducing 2021 assumption of USD65/barrel. Nonetheless, despite downside risks to oil prices, we believe that Brent crude prices hovering within the range of USD55-65/barrel are healthy enough to sustain a rebound in activity levels. Petronas’ capex commitment of RM40-45b per annum for the next five years, while still below pre-pandemic levels, is still a healthy rebound of ~20-35% from 2020. Realistically, we do not expect to see activities to recover to pre-pandemic levels any time soon, but the slow recovery will still be more than sufficient to keep contractors afloat. The dwindling interests in Malaysia from multinational oil majors could also see greater local participation in exploration fields, although we are still slightly mixed on this direction which will increase their exposure to oil price fluctuations, and also does not stand well with the overall ESG and clean energy transition agenda. We maintain NEUTRAL on the sector, given the limited upside for big-cap Petronas-named counters (i.e. PCHEM, PETDAG), but are increasingly optimistic on the contractors given the anticipated recovery in activity levels. TOP PICKS include DIALOG and SERBADK for their deeply attractive valuations, as well as their resilient and promising earnings growth prospects.

Oil prices in rebound. YTD, oil prices have enjoyed a rebound rally, touching a high

of almost USD70/barrel. This was largely underpinned by: (i) weather-led supply disruption, especially in the U.S., (ii) OPEC+’s decision to continue current output cut levels in March, much to the market’s surprise (which was expecting OPEC+ will increase output to capitalise on higher oil prices), and (iii) anticipation of a recovery in global oil demand spearhead by vaccine roll-outs.

Despite so, we still see possible downside risks to oil prices from current levels, as we believe prices could have run ahead of demand-supply fundamentals for the past several weeks. This view is also shared by the IEA, which stated that data and analysis suggest that oil supplies remain plentiful, and that an oil “super cycle” is highly unlikely. Oil inventories in developed countries stood at 110m barrels above last year’s level as of January, and can be readily tapped as needed. Meanwhile,

world oil demand is expected to only recover back to pre-pandemic level in 2023. Given the output cuts, OPEC’s production capacity utilisation is also at a historical low (see chart below), and as such, we believe further increase in production from the coalition within the year would be an inevitability, and may cause a further knee-jerk reaction to oil prices. Overall, based on the current oil market dynamics, we are expecting to see a weaker 2HCY21 (versus 1HCY21), with possibility of Brent even dipping below the USD60/barrel mark.

Nonetheless, we revised our Brent crude average for 2021 to USD60/barrel (from previous assumptions of USD50/barrel), while introducing 2022 average assumption of USD65/barrel.

Recovery in activity levels. While we still see possible downside risks to oil prices, we believe that Brent crude prices

within the range of USD55-65/barrel will still be healthy enough to see a gradual resumption of activity levels. Locally, Petronas has guided capex of RM40-45b per annum for the next five years. While this is still below pre-pandemic levels, we do note that it is a healthy rebound of ~20-35% from 2020. Realistically, we do not expect to see activities recover to pre-pandemic levels any time soon, but nonetheless, the slow recovery in jobs will be enough to keep contractors and equipment providers busy, and will certainly be more than sufficient to keep the vast majority of companies afloat. In terms of value-chains, we see a possibility for brownfield players (e.g. Uzma) and hook-up and commissioning (e.g. Dayang) to see resumption of work orders in 2021 after facing numerous job delays in 2020. Meanwhile, global FPSO providers (e.g. Yinson) may also benefit from the resumption of tendering opportunities in the coming few years, amidst the lack of bidding competition in the international scene.

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Oil & Gas Sector Update Sector Update

05 April 2021

PP7004/02/2013(031762) of 9

Greater local participation in oil fields exploration. We believe Petronas’ recent launch of the Malaysia Bid Round

2021 could see an increased number of local participation. To recap, the bid round puts 13 oil and gas exploration and undeveloped blocks for offer. Prospective bidders will have until early October to submit their tenders, with the award date expected to fall in 4QCY21, and the production sharing contracts to be signed in 2QCY22 (subject to draft clarification and finalisation). That said, we observe that many multinational oil majors have been intending to scale back on their investments in Malaysia, pointing towards recent examples such as (i) ExxonMobil putting all of its Malaysian upstream assets for sale, eyeing a valuation of USD2-3b, (ii) recent reports of Repsol also looking to exit Malaysia, (iii) Shell looking to divest some of its Malaysian non-core assets, although Malaysia was still named as one of nine remaining core global areas of the group as it embraces the energy transition trend, citing that the peak oil has already passed in 2019, and (iv) Murphy Oil’s exit from Malaysia in June 2019, after it sold its assets to Thailand’s PTTEP for USD2.13b. As such, given the dwindling interests from international players, we believe this could have a cascading effect, leading to greater participation from local players. According to press reports, several local players have been invited to participate in the bid round. These names include Dialog, Petra Energy, Hibiscus, Uzma and Sapura Energy. Likely, a consortium with foreign companies will be formed during the bidding to compensate for the lack of expertise. Dialog, Sapura Energy, Petra Energy and Uzma have prior experiences of marginal fields developments in the past via risk service contracts with Petronas. Meanwhile, with Hibiscus still actively looking to expand its upstream portfolio, participation from the company could also be likely. Overall, we are slightly mixed on this, especially for contractor names with limited expertise in E&P. While participation in production sharing contracts could help expand these companies’ earnings base, it will also increase their exposure to fluctuations of oil prices. Additionally, doubling down on hydrocarbons by increasing their upstream portfolio could also be sending a wrong message ESG-wise as the world is moving towards clean energy.

Maintain NEUTRAL, given the limited upsides on large cap Petronas-named counters (e.g. PCHEM, PETDAG).

Nonetheless, we are increasingly optimistic on the sector, given the gradual recovery of activity levels. Our stock picks are as follows:

Sector TOP PICKS: SERBADK (OP, TP: RM2.80), and DIALOG (OP, TP: RM4.35), given their hugely

attractive valuations with promising and resilient earnings growth prospects.

Oil price proxies: PCHEM (MP, TP: RM7.50) and HIBISCS (NR), given their high share price

correlation to crude oil prices.

Additionally, several changes to our calls and TPs have also been made:

Changes in Calls and TP Company Old Call Old TP (RM) New Call New TP (RM) Commentary

ARMADA OP 0.49 OP 0.49 No changes.

DAYANG MP 1.45 OP 1.80 Upgraded call to OP, with new TP of RM1.80 (pegged to 1.1x PBV, close to historical mean), on the back of anticipated recovery in work orders, especially for hook-up and commissioning. TP also implies forward PER of 14x.

DIALOG OP 4.35 OP 4.35 No changes. MISC OP 8.10 OP 8.10 No changes.

PCHEM MP 7.50 MP 7.50 No changes. PETDAG UP 17.60 UP 17.60 No changes. SAPNRG UP 0.05 OP 0.21 Upgraded call to OP, with new TP of RM0.21 (pegged to 0.4x PBV,

close to historical mean), given expected recovery in jobs flow. Recently concluded refinancing exercise also lengthens the group’s debt maturity profile and eliminates any near-term borrowings default risks.

SERBADK OP 2.80 OP 2.80 No changes.

UZMA OP 0.83 OP 1.00 Raised TP to RM1.00 (pegged to 0.6x PBV, close to historical mean) – implying 10x forward PER, on the back of anticipated recovery in work orders. We are also positive on the group’s diversification into renewable energy, having recently secured 50MW in LSS4.

VELESTO UP 0.11 UP 0.11 No changes.

WASEONG MP 0.72 MP 0.72 No changes. YINSON OP 6.95 OP 6.95 No changes.

Source: Kenanga Research


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PP7004/02/2013(031762) of 9

Appendix

OPEC’s Production Volumes and Capacity Utilisation Trend

65%

70%

75%

80%

85%

90%

95%

100%

22,000

24,000

26,000

28,000

30,000

32,000

34,000

36,000

38,000

40,000

Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21

OPEC Production ('000 bpd) OPEC Production Capacity ('000 bpd) Capacity Utilisation (%)

Source: Bloomberg, Kenanga Research

Commentary: OPEC’s production capacity utilisation is in record low, given its compliance in production cuts.

OPEC’s Oil Production Breakdown (as at February 2021) Member Country Production (‘000 barrels per day) Capacity (‘000 barrels per day)

Algeria 880 1,080

Angola 1,100 1,450

Congo, Republic 260 330

Equatorial Guinea 100 150

Gabon 190 220

Iran 2,110 3,830

Iraq 3,910 4,800

Kuwait 2,350 3,075

Libya 1,150 1,300

Nigeria 1,600 2,000

Saudi Arabia 8,150 11,500

U.A.E. 2,630 4,200

Venezuela 440 600

TOTAL 24,870 34,535



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PP7004/02/2013(031762) of 9

Crude Oil – Total World Consumption vs Supply

80

85

90

95

100

105

Jan-

18

Feb

-18

Ma

r-1

8

Apr

-18

May

-18

Jun-

18

Jul-

18

Au

g-1

8

Sep

-18

Oct

-18

No

v-1

8

De

c-1

8

Jan-

19

Feb

-19

Ma

r-1

9

Apr

-19

May

-19

Jun-

19

Jul-

19

Au

g-1

9

Sep

-19

Oct

-19

No

v-1

9

De

c-1

9

Jan-

20

Feb

-20

Ma

r-2

0

Apr

-20

May

-20

Jun-

20

Jul-

20

Au

g-2

0

Sep

-20

Oct

-20

No

v-2

0

De

c-2

0

Jan-

21

Feb

-21

Ma

r-2

1

Apr

-21

May

-21

Jun-

21

Jul-

21

Au

g-2

1

Sep

-21

Oct

-21

No

v-2

1

De

c-2

1

Jan-

22

Feb

-22

Ma

r-2

2

Ap

r-22

May

-22

Jun-

22

Jul-

22

Au

g-2

2

Sep

-22

Oct

-22

No

v-2

2

De

c-2

2

Total World Consumption Total World Supply

Forecast

Source: EIA, Kenanga Research

Commentary: Oil demand likely to recovery to pre-pandemic levels only in end-2022 / 2023.

U.S. Stocks of Crude Oil

1,800,000

1,850,000

1,900,000

1,950,000

2,000,000

2,050,000

2,100,000

2,150,000

Jan

-18

Feb

-18

Mar

-18

Ap

r-1

8

May

-18

Jun-

18

Jul-

18

Au

g-18

Sep

-18

Oct

-18

Nov

-18

Dec

-18

Jan

-19

Feb

-19

Mar

-19

Ap

r-1

9

May

-19

Jun-

19

Jul-

19

Aug

-19

Sep

-19

Oct

-19

Nov

-19

Dec

-19

Jan

-20

Feb

-20

Mar

-20

Ap

r-2

0

Ma

y-2

0

Jun-

20

Jul-

20

Aug

-20

Sep

-20

Oct

-20

Nov

-20

Dec

-20

Jan

-21

Feb

-21

Mar

-21

'00

0 B

arr

els

Source: EIA, Kenanga Research

Commentary: Share drop in crude oil inventory levels since mid-2020, but still above pre-pandemic levels.


05 April 2021

PP7004/02/2013(031762) of 9

Petronas Yearly Capex

37.6

44.0

37.134.9

45.6

56.6

64.6 64.7

50.5

44.546.8 47.8

33.4

0%

20%

40%

60%

80%

100%

120%

0

10

20

30

40

50

60

70

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Capex (RM bil)RM bil

Source: Petronas, Kenanga Research

Commentary: Petronas has guided capex of RM40-45b per annum for the next five years.

Petronas’ Historical Dividend Payments

11

18

24

30 30 30 3026 27

2926

16 16

29

54

34

0

10

20

30

40

50

60

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Dividends Paid (RM bil)

Source: Petronas Commentary: Petronas is expected to pay dividend of RM18b in 2021.


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KL Energy Index – PBV valuation vs historical average

Source: Bloomberg, Kenanga Research Commentary: Sector is trading at close to historical mean PBV.

KL Energy Index – PER valuation vs historical average



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Comparison of Current Valuations Against Mean Company Name Current Forward PBV (x) 5-year Average PBV (x) Market Cap (RM mil) Net-gearing (x)

PETRONAS CHEMICALS GROUP BHD 2.2 2.1 65,600.0 -0.3

MISC BHD 0.9 0.9 30,308.8 0.2

PETRONAS DAGANGAN BHD 3.5 4.1 19,988.3 -0.4

DIALOG GROUP BHD 3.7 4.3 17,942.3 0.2

SERBA DINAMIK HOLDINGS BHD 2.0 2.6 6,380.6 0.9

LOTTE CHEMICAL TITAN HOLDING 0.5 0.7 6,000.7 -0.3

YINSON HOLDINGS BHD 1.6 1.5 5,827.2 0.6

BUMI ARMADA BERHAD 0.8 0.7 2,560.4 2.4

SAPURA ENERGY BHD 0.3 0.6 2,476.8 1.0

DAYANG ENTERPRISE HLDGS BHD 1.1 0.9 1,868.8 0.1

HENGYUAN REFINING CO BHD 0.8 1.1 1,662.0 0.0

VELESTO ENERGY BHD 0.5 0.8 1,437.7 0.3

HIBISCUS PETROLEUM BHD 0.9 1.0 1,312.2 0.0

PETRON MALAYSIA REFINING & M 0.7 1.2 1,236.6 0.2

MALAYSIA MARINE AND HEAVY EN 0.6 0.5 1,136.0 -0.2

WAH SEONG CORP BHD 0.9 0.8 662.0 1.1

KNM GROUP BHD 0.3 0.3 637.6 0.6

COASTAL CONTRACTS BHD 0.4 0.4 429.6 -0.2

PERDANA PETROLEUM BHD 0.4 0.5 365.6 0.1

PANTECH GROUP HOLDINGS BHD 0.5 0.7 355.7 0.2

PETRA ENERGY BHD 0.8 0.8 312.9 -0.3

ICON OFFSHORE BHD 0.8 1.0 310.9 0.8

UZMA BHD 0.6 0.8 259.2 0.9

T7 GLOBAL BHD 1.3 1.1 258.9 0.9

TECHNA-X BHD 1.7 0.5 256.6 0.0

DELEUM BERHAD 0.7 1.3 249.0 -0.2

CARIMIN PETROLEUM BHD 1.0 0.8 164.9 -0.5

ALAM MARITIM RESOURCES BHD 0.3 0.3 121.9 0.2

REACH ENERGY BHD 0.3 6.2 109.6 0.0

HANDAL ENERGY BHD 0.7 0.6 57.1 0.1

SCOMI ENERGY SERVICES BHD 0.3 0.5 51.5 0.4


Note: Identified counters trading at steep discounts against their averages are highlighted in green (i.e. >50% discounted compared to average valuations).

Share Price vs Brent Crude Price – Correlation Analysis

-0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8 1.0

MISC BHD

DIALOG GROUP BHD

YINSON HOLDINGS BHD

DAYANG ENTERPRISE HLDGS BHD

CARIMIN PETROLEUM BHD

PETRA ENERGY BHD

KNM GROUP BHD

SERBA DINAMIK HOLDINGS BHD

PERDANA PETROLEUM BHD

T7 GLOBAL BHD

SCOMI GROUP BHD

HENGYUAN REFINING CO BHD

BUMI ARMADA BERHAD

WAH SEONG CORP BHD

TECHNA-X BHD

ICON OFFSHORE BHD

ALAM MARITIM RESOURCES BHD

MALAYSIA MARINE AND HEAVY EN

VELESTO ENERGY BHD

HANDAL ENERGY BHD

COASTAL CONTRACTS BHD

SCOMI ENERGY SERVICES BHD

PETRON MALAYSIA REFINING & M

SAPURA ENERGY BHD

LOTTE CHEMICAL TITAN HOLDING

PETRONAS DAGANGAN BHD

UZMA BHD

REACH ENERGY BHD

PANTECH GROUP HOLDINGS BHD

DELEUM BERHAD

HIBISCUS PETROLEUM BHD

PETRONAS CHEMICALS GROUP BHD


Note: Study uses a period from start-2018 to present day.

Oil & Gas Sector Update

05 April 2021

PP7004/02/2013(031762) of 9

Peer Comparison

Name Price Market Shariah Current Revenue Growth

Core Earnings Growth

PER (x) - Core Earnings

PBV (x) ROE (%)

Net Div.Yld.

(%) Target Rating

(RM)

Cap (RM'm)

Compliant FYE 1-Yr. Fwd.

2-Yr. Fwd.

1-Yr. Fwd.

2-Yr. Fwd.

Hist. 1-Yr. Fwd.

2-Yr. Fwd.

Hist. 1-Yr. Fwd.

1-Yr. Fwd.

1-Yr. Fwd.

Price (RM)

BUMI ARMADA BHD 0.435 2,560.4 N 12/2021 4.3% 0.0% -6.4% 7.1% 5.4 5.7 5.4 0.8 0.7 13.2% 0.0% 0.490 OP

DAYANG ENTERPRISE HLDGS BHD 1.50 1,881.4 Y 12/2021 13.6% 16.1% 42.9% 60.5% 26.0 18.2 11.3 1.1 1.1 6.0% 0.0% 1.80 OP

DIALOG GROUP BHD 3.11 17,547.4 Y 06/2021 -33.7% 26.3% 1.8% 11.5% 29.1 28.6 25.7 4.2 3.8 14.1% 1.0% 4.35 OP

MISC BHD 6.80 30,353.5 Y 12/2021 20.3% 7.3% 0.2% 1.0% 14.1 14.0 13.9 0.9 0.9 6.6% 4.9% 8.10 OP

PETRONAS CHEMICALS GROUP BHD 8.00 64,000.0 Y 12/2021 9.3% 10.3% 30.8% 16.4% 33.4 25.5 21.9 2.1 2.0 8.1% 2.0% 7.50 MP

PETRONAS DAGANGAN BHD 19.96 19,829.3 Y 12/2021 10.2% 10.2% 58.9% 48.3% 69.6 43.8 29.5 3.5 3.5 8.0% 2.3% 17.60 UP

SAPURA ENERGY BHD 0.145 2,317.0 Y 01/2021 -11.4% 8.7% -112.1% -242.4% N.A. N.A. N.A. 0.3 0.3 -1.8% 0.0% 0.210 OP

SERBA DINAMIK HOLDINGS 1.72 6,380.6 Y 12/2021 12.0% 12.0% 10.0% 10.0% 10.1 9.2 8.3 2.0 1.5 18.7% 3.3% 2.80 OP

UZMA BHD 0.755 241.6 Y 06/2021 -6.8% 2.3% 851.9% 20.2% 89.5 9.4 7.8 0.5 0.5 5.5% 0.0% 1.00 OP

VELESTO ENERGY BHD 0.170 1,396.7 Y 12/2021 -14.5% 20.9% -168.4% -42.3% N.A. N.A. 85.2 0.6 0.6 -1.3% 0.0% 0.110 UP

WAH SEONG CORP BHD 0.830 642.7 Y 12/2021 34.8% 15.8% -59.0% 203.6% N.A. 28.6 9.4 0.9 0.9 3.1% 0.0% 0.720 MP

YINSON HOLDINGS BHD 5.34 5,688.7 Y 01/2022 -6.6% -15.5% -10.0% -16.6% 9.2 10.2 12.2 3.2 2.5 27.4% 1.1% 6.95 OP

Simple Average 2.6% 9.5% 53.4% 6.4% 31.8 19.3 21.0 1.7 1.5 9.0% 1.2%



05 April 2021

PP7004/02/2013(031762) of 9

Stock Ratings are defined as follows: Stock Recommendations

OUTPERFORM : A particular stock’s Expected Total Return is MORE than 10% MARKET PERFORM : A particular stock’s Expected Total Return is WITHIN the range of -5% to 10% UNDERPERFORM : A particular stock’s Expected Total Return is LESS than -5% Sector Recommendations***

OVERWEIGHT : A particular sector’s Expected Total Return is MORE than 10% NEUTRAL : A particular sector’s Expected Total Return is WITHIN the range of -5% to 10% UNDERWEIGHT : A particular sector’s Expected Total Return is LESS than -5% ***Sector recommendations are defined based on market capitalisation weighted average expected total return for stocks under our coverage.

This document has been prepared for general circulation based on information obtained from sources believed to be reliable but we do not make any representations as to its accuracy or completeness. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may read this document. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees. Kenanga Investment Bank Berhad accepts no liability whatsoever for any direct or consequential loss arising from any use of this document or any solicitations of an offer to buy or sell any securities. Kenanga Investment Bank Berhad and its associates, their directors, and/or employees may have positions in, and may effect transactions in securities mentioned herein from time to time in the open market or otherwise, and may receive brokerage fees or act as principal or agent in dealings with respect to these companies.

Published and printed by: KENANGA INVESTMENT BANK BERHAD (15678-H) Level 17, Kenanga Tower, 237, Jalan Tun Razak, 50400 Kuala Lumpur, Malaysia Telephone: (603) 2172 0880 Website: www.kenanga.com.my E-mail: [email protected]

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