Maybank Investment Bank Research expects re-rating for the oil and gas industry

Maybank Investment Bank Research says as risk appetite improves, it continues to expect a re-rating in the second half of 2015 for the oil and gas sector.

The research house said on Monday investors should thus position for key picks ahead of the recovery.

“Share prices of all O&G service providers have rebounded off their lows in December 2014. KNM has emerged as the top performer; share price has risen 47.3% year to-date when compared against its O&G peers,” it said.

Maybank Research said despite the recovery in market values, majority of the stocks are still trading at single digit price-to-earnings ratio (PER) multiples.

“Of the 13 O&G groups under our research coverage, six (Alam, Icon, KNM, MMHE, Perdana and Perisai) are trading at below one time price-to-book value,” it said.

Due to the rising risk appetite, the research house continued to advocate a focus on service providers in the production phase, which are less sensitive to oil price movements and capex cuts given their steady, long-term contract exposure.

It pointed out producing fields will continue to operate for they need to incur just opex and not capex to sustain brownfield activities.

“We maintain our earnings forecasts, target price calls for all O&G stocks under our coverage. Dialog Group (tank terminal and re-gas ops), Yinson (FPSO), BArmada (FPSO) and Perdana (brownfield OSVs) are our key tactical BUYs.

“Of these, Dialog is the only Shariah compliant stock (a scarcity premium) while Perdana is an acquisition target. We expect consolidation to set in with several opportunistic M&A potentials, notably in the OSV and FPSO space. These key picks offer a compelling 14%-71% upside to their TPs,” it added.

Downside risks to 2015 earnings include (i) persistent high volatility in oil price, (ii) sustained low oil price level at sub US$60 a barrel, (iii) contract replenishment due to delays, suspension of new projects and (iv) cost overruns and higher opex, just to name a few.

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