• Malaysian O&G sector will be supported by Petronas’ initiatives to arrest declining hydrocarbon output. Given that Malaysian O&G players have far less global exposure than their regional peers, the former may not beseverely affected by another bout of recessionary outlook.
• Potential issues for sector include delays in contract awards by Petronas, which may affect O&G players’ earnings growth. However, the impact should beminimal for larger players
given more diversified exposure and resilient earnings supported by strong order books
• Our top pick for the sectoris SapuraKencana for its growth, strong margins and dominance in several O&G services in Malaysia. We also like Dayang for its strong earnings visibility underpinned by a RM1.3bn outstanding order book that will keep it busy until FY15.
Oil & Gas stock picks: Dayang, Sapura Kencana
(1) Global expansion. SapuraKencana offers strong value proposition given its full spectrum of O&G services and vessel chartering track record. Solid partnerships with global players such as Seadrill, Subsea7 and L&T not only offer technical collaboration, but opportunities to expand its foothold beyond Malaysia
(2) Expanding strategic asset base.Its maiden foray into Brazil with the US$1.4bn pipelay vessel charter contract secured in Nov11 marks the beginning of its aggressive global expansion. The five new pipelay support vessels to be delivered by CY14 will boost FY16 earnings. It also owns six tender rigs, making it the largest rig owner/operator in the region. Two more rigs will be completed by CY14.
(3) Prime beneficiary of Petronas’ capex.Its quality asset base will turn SapuraKencana into a prime beneficiary of Petronas’ RM300bn capex spending, with RM2.5bn new orders secured YTD.Monopoly in Malaysia deepwater pipe-laying and drilling services, coupled with established marine support services, should see SapuraKencana as a strong contender for mega contracts in Malaysia.
(4) 2nd marginal field RSC in the pipeline. SapuraKencana will have no problem taking this on, given its enlarged balance sheet and full spectrum of O&G services. Current tender book stands at RM7bn, of which 50% is from Malaysia. Tender book is expected to increase to RM12bn by end-2012.
by HWDBS Vickers.