Oil & Gas - Another Good Run In Store For 2014 (OSK)

In 3QCY13, only three out of the 15 companies we cover beat estimates whereas four were in line. We reaffirm our OVERWEIGHT call on the sector as we expect domestic capex spending to rise in FY14. There are a rising number of companies participating in international tenders, which suggests earnings growth if bids are successful. Hence, we prefer companies with both domestic and international exposure.

• A poor outing in 3QCY13. Only three out of 15 companies exceeded our expectation in 3QCY13 – Petronas Gas, Coastal Contracts and Alam Maritim Resources, whereas four - SapuraKencana Petroleum, Favelle Favco, Bumi Armada and Perisai Petroleum – were in line. The underperformance was largely attributed to: i) delays in project execution, ii) expiry of contracts whose extension options were not exercised by clients, iii) unanticipated higher operating costs, iv) delays in the award of projects, and v) our overly optimistic 2013 outlook on the O&G sector as a whole.
• Petronas to go on accelerated spending spree.As of Sept 2013, Petronas had spent about MYR38.4bn, possibly falling short of its annual planned capex of MYR60bn. As we believe that some of the planned capex will be backloaded in the next two years, we expect more projects to take off during this period.
• Remain OVERWEIGHT.We are still positive on the sector as we expect strong earnings growth arising from: i) new contracts, especially those relating to marginal fields and enhanced oil recovery (EOR) projects, ii) the execution of existing contracts, and iii) potential mergers & acquisitions (M&As). In addition, a rising number of companies are participating in international tenders, which suggests a more rapid earnings growth if bids are successful, and a reduced dependence on Petronas. In view of this, we prefer stocks with both domestic and international exposure.
• Top picks.Bumi Armada (BAB MK, BUY, FV: MYR4.50) and Dayang Enterprise (DEHB MK, BUY, FV: MYR6.72) are our top picks for the bigand mid-cap space respectively. Our small-cap picks are Perisai Petroleum Teknologi (PPT MK, BUY, FV: MYR1.62) and Daya Materials (DAYA MK, BUY, FV: MYR0.42).