Apr 27, 2010

AM Overweight on Oil & Gas Sector Stocks

AMResearch remain OVERWEIGHT on the sector with top pick being SapuraCrest Petroleum. Also like Kencana Petroleum, Coastal Contracts, Alam Maritim Resources, Tanjung Offshore, Dialog Group, Petronas Gas, Scomi Group and Wah Seong Corp.

•  Corporate activities are gaining momentum in the region amid Petronas’ recent announcement of its intention to list its petrochemical business and MISC’s Malaysia Marine & Heavy Engineering Sdn Bhd.
•  On Saturday, Yangzijiang Shipbuilding Holdings Ltd (YZJ), a Singapore-listed shipbuilder based in Jiangyin, China announced that together with two other investors, it had launched a US$155mil joint tender offer to buy the entire stake in Singapore-based PPL Holdings Pte Ltd, a wholly owned subsidiary of Baker Technology Ltd. 
•  PPL Holdings owns a 15% stake in PPL Shipyard Pte Ltd, while SembCorp Marine Ltd (SembMarine) holds the remaining 85% stake. Hence,  SembMarine announced this morning that this development has triggered its pre-emption rights for the remaining 15% in PPL Shipyard Pte Ltd.
•  PPL Shipyard has an established track record in building jack-up rigs and semi-submersible rigs. To date, PPL has built a total of 40 jack-up rigs (of which 15 units are PPL’s own designed Pacific Class 375 design), six Semi-submersibles and four Swamp barges. 
•  YZJ hopes to strengthen its capability in offshore drilling design and operations from the proposed acquisition. To finance the acquisition, Yangzijiang Shipbuilder will issue 84 million shares to the Middle East-based investment firm to raise US$78mil. 
•  But Singapore companies are also beginning to take an interest in Malaysian players. Recall that Ezra had recently bought a 20% stake in Malaysia-listed Perisai Petroleum Teknologi Bhd (Perisai) for RM64mil. Malaysian companies also on the prowl for acquisitions include Kencana Petroleum - which recently raised RM200mil from its rights issue - and Wah Seong Corp, which is looking at financially distressed Socotherm. 
•  For new orders, Singapore companies have received the bulk of oil & gas projects since beginning of the year. In 1Q10, Singapore garnered US$1.9bil (+5% QoQ) compared to Malaysia’s US$72mil (-96% QoQ) (See Chart 1). This  is no surprise as we had highlighted in our report dated 11 March that local projects are likely to materialise towards year-end. We remain positive on the sector’s prospects, as pace of new contract awards are likely to accelerate overseas in India, Brazil and Middle-East.
•  We remain OVERWEIGHT on the sector with our top pick being SapuraCrest Petroleum given its huge order book, improving execution capabilities, healthy balance sheet, high
stock liquidity and presence of Seadrill as a substantial shareholder shareholder. We also like Kencana Petroleum, Coastal Contracts, Alam Maritim Resources, Tanjung Offshore,
Dialog Group, Petronas Gas, Scomi Group and Wah Seong Corp. Our HOLDs are KNM Group and Boustead Heavy Industries Corp. 

Below: Oil & Gas Sectors valuations and recomendations (click to enlarge)Oil-gas-sector-stocks