Oil & Gas Sector Comparison

Oil & Gas Underweight (unchanged)

Sub-par scorecard in 4Q08
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O&G’s combined earnings slumped 182% QoQ in 4Q08 as major disappointments came from Ramunia, Shell, Petronas Gas and Petra.

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We have cut 2009-10’s earnings forecasts by 16-19%, reflecting the sector’s down-cycle and a tighter funding environment.

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Maintain Underweight, with no key re-rating catalysts, but depressed valuations could fuel privatizations.

O&G companies largely underperformed in 4Q08, as combined net earnings slumped 182% QoQ. Among the major disappointments were Ramunia (cost overruns), Shell (inventory loss and negative GRM), Petronas Gas (losses at the utilities division, lower product demand and ASP) and Petra Perdana (brownfield operations and provisions). EPIC was a good surprise, both on earnings and dividends front. Overall (ex-Ramunia), O&G companies incurred exceptional losses amounting to RM57.4m mainly on provisions and amortization costs.

We lowered sector earnings by 16-19% in 2009-10, mainly coming from KNM (on RM50m p.a. amortization cost and slower replenishment rate), Petra Perdana (due to lower contributions from brownfield operations) and Petronas Gas (dragged down by continuous losses at the utilities division). We now expect corporate earnings to contract by 2.2% in 2009 before recovering to 5.8% in 2010. We caution that there could be further downgrades to our forecasts should global economy further deteriorates.

Suffocating from downcycle; stress tests show little liquidity crunch. The global credit crunch and economic down-cycle have altered the business landscape of the industry with players adjusting to the new environment. Companies are now more conscious of their balance sheet and cash flows in the wake of the global credit crunch. Many have scaled down capital expenditure programs and securing new funding is stricter as banks are putting greater scrutiny to new applications. However, our stress test indicates little liquidity crunch affecting O&G companies for now except for Ramunia, which could be fall into PN17 category following MISC’s aborted RTO deal.

Unlikely to stimulate in the mid-term on low oil prices but depressed valuations could trigger privatizations. We remain Underweight on the sector. We have also downgraded Petronas Gas to Sell (from Fully Valued), on expected earnings contraction and locking in our less favourable views ahead of the next GPTA review in Apr 2010. Wah Seong has been re-rated to a Hold (from Buy) on narrowing discounts to peers valuations. We have tactically upgraded Tanjung Offshore to Trading Buy (from Hold) on short term attraction to dividend payout, and retain Buys on Alam Maritim and Dialog. We acknowledge that valuations for most are at near rock-bottom which could trigger privatization talks especially for EPIC, KNM, Ramunia, Petra Perdana.

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