Oil And Gas: A slick 1Q09 performance
An improved performance. While the results announced by oil & gas (O&G) companies in Mar-May 09 were a mixed bag, they leaned towards the positive, unlike the previous quarter. A third of the six companies in our portfolio missed our forecasts, an improvement on 50% in 4Q08. Half of the companies broadly met our expectations (4Q08: 17%) and one (17%) surprised on the upside (4Q08: 33%). Since 1 May 09, the share prices of O&G stocks under our coverage have jumped by an average 28%, reflecting the overall encouraging reporting season. • Three trends in 1Q09. 1) Margins picked up as companies climbed the value chain: Except for Dialog, all the companies in our O&G portfolio showed margin improvement, with average EBIT margin rising from 14% in 4Q08 to 20% in 1Q09. 2) Late delivery remains a problem for offshore support vessel (OSV) operators: In total, Petra Perdana and Alam missed six vessel delivery dates due to assembly line congestion and delayed shipment of parts. 3) Petroleum retailers and refiners bounced back: The rising crude oil price supports the selling prices of products that are not subject to automatic pricing mechanism (APM) and refiners benefited from inventory gains. • Service providers stand to benefit. YTD, the oil price has jumped 56%, reflecting factors such as 1) a weakening US dollar, which encourages speculative money to flow into the market, and 2) an increased risk appetite among investors who anticipate an economic recovery. As a producing country, Malaysia is poised to benefit from the upward march of the oil price. Petronas-licensed service providers offering works and facilities such as yards, tank terminals, offshore structures and maintenance job stand to win the most. • Target price increases. There are no changes to our forecasts. However, we are raising our target prices by 11% for Dialog, Kencana, SapuraCrest and Wah Seong to reflect our recent index target upgrade. We now apply our revised target market P/E of 15x to the stocks, instead of 13.5x. Our target prices for Alam, Petra Perdana and Petronas Dagangan are maintained. • Kencana replaces Petra Perdana as top pick. YTD, Petra Perdana’s share price has risen by a whopping 120%, making the stock an outstanding performer in our oil & gas portfolio. While we still like the stock, we are replacing it with Kencana as our top pick. We believe Kencana’s newsflow and order book replenishment over the next few months will be more exciting. • Maintain OVERWEIGHT. We remain OVERWEIGHT on the oil & gas sector in view of the potential re-rating catalysts of 1) M&As, and 2) more active newsflow. Also unchanged are all our stock recommendations and earnings forecasts.
