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Monday, October 31, 2011

Maintain Overweight on O&G sector (OSK)

Our top picks are Kencana (Buy, FV: RM3.17) and Dialog (Buy, FV: RM3.66). With an improving global economic outlook and crude oil price having gone back to around USD90/barrel, we believe that O&G activities will gradually pick up, which would then benefit all O&G service providers through better utilization rates and higher sales/unit or services/hour rates. On the local front, we expect the industry to be in for more marginal oilfield developments as well as the increasing need for brownfield services to boost O&G production while waiting for the commencement of deepwater activities on a large scale after pre-development preparations are completed. We gather that the ratio between shallow waters and deepwater O&G production is still at 70:30 but over time, the deepwater portion will pick up after all the easy O&G finds deplete. Hence, we think Petronas is now preparing the local O&G supporting services providers for marginal oilfield (shallow water) developments first before embarking into the more challenging terrain (deepwater).

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