Oil & Gas - Where Now, Crude Oil Prices?

Date: 30/12/2014

Source : KENANGA
Stock : SKPETRO     Price Target : 3.03     |     Price Call : BUY
    Last Price : 2.80     |     Upside/Downside :  +0.23 (8.21%)
Source : KENANGA
Stock : PETGAS     Price Target : 22.14     |     Price Call : HOLD
    Last Price : 22.36     |     Upside/Downside :  -0.22 (0.98%)
Source : KENANGA
Stock : BARAKAH     Price Target : 1.34     |     Price Call : BUY
    Last Price : 0.95     |     Upside/Downside :  +0.39 (41.05%)

The oil & gas sector was the main casualty of the recent heavy stock selldown following the plunge in crude oil prices and the dismal 3QCY14 results season. Not of help was Petronas announcing 15%-20% capex cut for 2015, which spooked the market even further. The biggest question now is the direction of crude oil price. Our Monte Carlo Simulation Study suggests a high chance that the ICE Brent Futures (spot month contract) could trade at an average of USD70/bbl for 2015; implying that the sector should trade at an average forward PER of 12x. Given such outlook, coupled with the fact that there could be continued sluggishness in contract flows (which is also imperative for domestic sector re-ratings); we have adjusted our target CY15 PER for stocks under our coverage. In such uncertain times, we continue to favour stocks that have strong order books and/or companies with exposure to the brownfield/rejuvenation segment. Our Top Pick is SKPETRO.
A lacklustre year-end. This sector was the main casualty of the market selldowns on the back of: (i) uninspiring crude oil prices, (ii) OPEC’s decision to maintain its production at 30.0mb/d in end-Nov, (iii) Petronas’ statement that it will cut 2015 capex by 15-20%, (iv) the dismal 3Q14 results season, and (v) Saudi Arabia’s cut in January prices to U.S. and Asian buyers.
USD70/bbl in 2015, implies sector average forward trading PER of 12x. Our Monte Carlo Simulation Study suggests that there is a high chance for the ICE Brent Futures (spot month contract) to trade at an average of USD70/bbl for 2015. Based on our simulation studies; at crude oil price of USD70/bbl, the sector average forward trading PER stands at 12x.
Still NEUTRAL for now. Despite significant sector de-rating, we still believe the underlying environment remains unsupportive of a meaningful near-term rebound. Short-term crude oil price trend is still volatile while sluggish contract award flows (a major catalyst for share price re-ratings for domestic stocks) with Petronas already stating capex cuts will cap sentiment as well.
Sector valuations re-jigged and earnings forecasts trimmed. In lieu of our neutral outlook, we have adjusted our target CY15 PERs on large-cap stocks to 13-19.5x (from 16-22.7x previously) and small-&-mid cap stocks to 7-10x (from 10-12x previously). We have also reviewed and trimmed the FY15 net profit estimates of selected companies as we opt to be conservative on activities for the time being.
Favour order book and brownfield-centric stocks. We may sound like broken records, but in light of the sector uncertainty, we favour companies with: (i) strong existing order-books as they provide some form of earnings certainty over the next 1-2 years, and/or (ii) companies that have exposure to the brownfield/rejuvenation segment which will be relatively unscathed from capex-cut impacts. We would avoid companies that are related to capexcentric segments (ie. fabrication or speculative asset buildings) and take note of those which are exposed to the E&P segment (as crude oil prices continue to be volatile).
Top picks. For the big cap space, we favour SKPETRO (OP; TP: RM3.03) for its improved risk-to-reward dynamics post the significant share price decline and PETGAS (MP; TP: RM22.14) should be a core-holding for portfolio-benchmarking purposes albeit it is fairly valued for now, given its sustainable earnings that are derived from concession assets. Within the small-&-mid cap space, we see value emerging for BARAKAH (OP; TP: RM1.34)again given the attractive CY15 PER of 4.7x (a significant discount to other peers which trade at 6-8x CY15 PER).
3Q14 setbacks. The 3Q14 earnings report card was a big disappointment with 7 results coming in below, 6 within, and only 2 above, our estimates. The largest disappointment came from PERISAI which barely scratched 1% of both our, and consensus’ estimates as higher-than-expected mobilisation and commissioning costs for its maiden jack-up rig (that started to contribute in 3Q14) ate into margins. This was a significant hit to the company's bottomline which was already suffering from two idle vessels (E3- pipelay barge; and Rubicone - MOPU). Meanwhile, for the other stocks within our coverage; most of the results disappointments were mainly due to slower-than-expected project performance and/or lower-than-expected margins. We believe the 4Q14 results season will be similarly uneventful given the onset of monsoon season where offshore asset utilisation is typically slower. Hence, it might be a quiet ending for 2014.
Petronas makes good on its previous capex-cut warnings. In our previous strategy reports we mentioned that Petronas has hinted of CY15 capex reductions since 2QCY14. On Nov-27, it made good on its hints and declared that: (i) it is going through with a 15-20% capex cut, (ii) Petronas will not proceed with contracts to award new marginal oil fields unless the crude oil price settles above USD80/bbl, and (iii) projects in Pengerang that have yet to receive the final investment decision (FID) will be affected by the cut-backs. Whilst we were mildly negative on this statement earlier, it is now loud and clear that the segment will see slower contract flows as Petronas reins in spending; especially on its new project commitments. For 4Q14, local oilfield companies saw c.RM4.6b of contracts; but this was skewed towards the Pengerang LNG project that was awarded to consortium members PETGAS and DIALOG. Worth RM2.7b, this implies that contracts other than those in RAPID have dwindled by 65.1% qoq, largely because of slower activity and/or projects are going to international bidders (instead of domestic players). Overall, CY14 saw contract wins of RM53.9b (versus RM44b in CY13). However 51% of CY14’s contract wins were from the downstream segment; where-else for CY13 it was mainly upstream contracts.
Source: Kenanga

Barakah Offshore Petroleum - A Surprise in 3Q14 !

Date: 26/11/2014

Source : KENANGA
Stock : BARAKAH     Price Target : 1.62     |     Price Call : BUY
    Last Price : 0.95     |     Upside/Downside :  +0.67 (70.53%)

Period  Jul14-Sep14/12M14
Actual vs. Expectations BARAKAH reported core net profit of RM28.4m for the period Jul14-Sep14 which brought 12M14 core net profit to RM62.4m. This made up 85.4% and 79.0% of our full-year forecast and consensus forecasts (for a 15-months period) of RM73.1m and RM79.0m, respectively.
 The result is above our and consensus expectations. The variance from our forecasts is due to higher billing from pre-commissioning works and Pan Malaysia T&I Package A projects.
 BARAKAH’s 12M14 core net profit was restated by management for: (i) the one-off gain on disposal of subsidiary Vastalux Energy Bhd, (ii) one-off impairment loss on goodwill, (iii) IPO listing expenses, and (iv) bad debts written-off.
 We highlight that BARAKAH has changed its FYE to December from September effective Jan-14. Thus, our FY14 forecast is for a 15-month period from Sep-13 to Dec-14.
Dividends  No dividend was declared as expected.
Key Results Highlights Core net profit for the period Jul14-Sep14 surged by >100.0% QoQ on the back of 60.3% increase in revenue and better margins. The increase in revenue is mainly due to: (i) completion of 2 pre-commissioning works, and (ii) higher revenue recognised from on-going T&I, EPCC and Hook-up Commissioning works. Net margins grew by +3.4pts; largely as the Apr14-Jun14 quarter was besieged by higher mobilisation costs as they had to mobilise for their current projects.
 The core net profit grew >100.0% YoY to RM28.4m, mainly due to the commencement of: (i) Pan Malaysia T&I projects that commenced in June-14 and (ii) other on-going Onshore Engineering, Procurement, Construction and Commissioning (EPCC) projects.
Outlook  Offshore Pan Malaysia works is expected to carry on until end of Nov-14, while onshore Pan Malaysia works is expected to commence from Dec-14 to Apr-15.
 For the Pengerang Pipeline project, pipes have been delivered in early Nov-14, hence earnings recognition from 1Q15 onwards is expected.
 Still no news on the Arab Saudi T&I tender, but there has been no sign of disqualification by the client. At this juncture, management believes work could only commence only by 2016.
 Excluding the tender book for the Arab Saudi project, we understand that BARAKAH is actively bidding for c.RM400m-RM600m worth of projects.
 Interestingly management also hinted they are open to moving into the E&P space.
Change to Forecasts We upgrade our FY14 forecasts to RM84.2m (+15.2%) as we expect higher revenue recognition (increased our revenue forecast to RM697.5m (+10.3%)) from pre-commissioning works and Pan Malaysia T&I Package A projects in the upcoming quarter.
 We maintain our FY15 forecasts for now; given the uncertainty in contract phasing for the next year.
Rating Maintain OUTPERFORM
Valuation  We trim our target CY15 PER on BARAKAH to 12x (from 13x previously) due to: (i) current sluggish crude oil prices, and (ii) Petronas’ cautionary statement on reviewing CAPEX allocation for 2015.
 Our ascribed PER is 20% above the 10x historical -1 standard deviation level for oil and gas stocks, as we believe BARAKAH deserves a premium for being a Pan Malaysia T&I contractor that gives it certainty in the eventuality of contract roll-outs.
 Post our PER cuts, the new TP is RM1.62 (from RM1.74 previously).
Risks to Our Call (i) Delay in the Pan-Malaysia’s T&I project execution, which will reduce the potential earnings being factored in our forecasts.
 (ii) Lower-than-expected margins.
Source: Kenanga

Barakah - Overshot expectations

Date: 26/11/2014

Source : MAYBANK
Stock : BARAKAH     Price Target : 1.35     |     Price Call : HOLD
    Last Price : 0.95     |     Upside/Downside :  +0.40 (42.11%)

  • 12MFY14  core  net  profit  made  up  84%  of  ours  and consensus’15MFY14 forecasts.
  • Raise 15MFY14 earnings by 16% for the strong 4QFY14 results.
  • Maintain HOLD with an unchanged MYR1.35 TP (10x 2016 PER).

What’s New

4QFY14  results  were  spectacular.  Core  net  profit  of MYR28m  (+131% QoQ, +168% YoY) took 12MFY14 core earnings to MYR62m (+52% YoY). The  QoQ  growth  came  mainly from  higher  revenue  from its  pipeline & commissioning  services  (+101%)  via  its  Pan  Malaysia  T&I  Package A works.  Barakah  recognised  3  months  works  from  Package  A  in  4Q (MYR85m,  33%  of  group  revenue)  vs.  1-month  in  3Q  (MYR40m).  Its installation & construction also aided revenue growth, up 41% QoQ. 

What’s Our View

We  raise  15MFY14  earnings  forecast  by  16%  to  account  for  the better-than-expected  4Q  results.  Works  for  the  T&I  Package  A  job will  continue to  anchor  5QFY14  performance.  We  expect  Barakah  to deliver  a  lower  core  net  profit  of  MYR22m  (-21%  QoQ)  in  the  final quarter due to slowdown of non T&I work.
Our  FY15-16  earnings  forecasts  are  unchanged.  While  we  expect Package A  to  continue  to  drive  earnings,  workflow  visibility  remains hazy for now, which Barakah concurs. We expect  strong 33% earnings growth in  FY15 from the full-year contribution from Package A but a flattish  FY16,  on  expectation  of  slowdown  of  workflows  as  broader industry  job/capex  reviews  kick  in.  We  expect  the  T&I  Package A  to generate MYR600m revenue p.a. in 2015-16.
Barakah  has  secured  MYR370m  new  jobs  for  FY14-to  date,  bringing its order  backlog  to  MYR2.1b  as  at  end-Nov  2014,  which  will  sustain earnings  visibility  over  the  next  2  years.  It  aims  to  replenish MYR600m  worth  of  works  annually.  It  remains  in  the  running  for several  Pengerang  related  works  (i.e.  tie-ins,  at  e.MYR300m,  the awards are expected in 1Q15).
Source: Maybank Research - 26 Nov 2014