♦ Better oil demand trends will set the stage for oil price recovery. While demand trends in Europe and Pacific OECD (i.e. Japan, South Korea and Australia) remain depressed, more stable US demand and pick-up in China’s manufacturing activity suggest that the path to a recovery in demand has improved over the medium term.
♦ Sustainability of oil majors’ capex. Unlike North America, we believe the majority of E&P companies in Malaysia waters (i.e. international oil companies and Petronas) are cash rich and with a considerable portfolio of long-term sanctioned projects.
♦ Sector re-rated on stronger earnings growth in FY10-11. Crude oil prices appear to have reached a comfort zone of around US$50/barrel, although we still expect some volatility in the near term of around US$10 on either side. Longer term, we believe crude oil prices would gradually rise beyond that range against the backdrop of global economic recovery. Thus, we believe investors should already be looking at better earnings growth for the O&G service providers in 2010-11.
♦ Entry and exit levels for trading opportunities. We note that there is high correlation of share price performance to crude oil price and the general trend suggests that share price tends to lead on the upswing and lag on the downswing. Most of the O&G stocks under our coverage are trading at or below current crude oil price levels, with the exception of Wah Seong.
♦ Upgrade to Overweight. While we currently estimate FY10-11 EPS growth for the sector (ex-Petronas Gas) of 17% and 13% respectively, we highlight that there is upside to our estimates if contracts begin to flow again amidst the gradual recovery in crude oil prices. While we recognise the nearer-term risk that contracts would continue to be deferred/re-negotiated, we believe this is mostly discounted by the market. We reiterate our view that the continued shortage of offshore E&P assets will underpin the longer-term growth in E&P activity. Hence we upgrade the sector to Overweight (from Neutral). Given current trading environment our top pick are SapuraCrest
and KNM.
By RHBinvest
Analyst: Wong Chin Wai
Posted by Bursa Street at 9:46 PM
