Top Story : Oil & Gas – Stronger contract flows ahead Overweight
Sector Update
- While we now expect 4Q 2009 crude oil price to be range bound at US$70-80/barrel (vs. US$60-70 previously) capped by still weak demand from US and Europe, we have revised up our 2010-11 crude oil projections to US$80-100 and US$100-120 respectively (from US$60-80 and US$80-100 previously) given higher energy demand stemming from the recovery of economic activity in US and Europe as well as supply shortages.
- With crude oil price hovering around US$70-80 and likely to trend higher in 2010, we believe more greenfield upstream and deepwater projects would begin to flow again. We gathered that inquiries for jack-ups in the Gulf of Mexico have increased since mid-Sep given higher E&P activities.
- With E&P spending thus likely to pick-up momentum, we believe local players with the right assets (pipelay barges and seismic vessel for SapuraCrest), proven track record (Dialog and Kencana) as well as strong market position (Wah Seong) are well positioned to benefit from the early cycle of fresh contract awards.
- Hence, we have upgraded Wah Seong, Kencana and SapuraCrest to our top-tier premium stocks (vs. only Dialog previously) given improved longer-term earnings visibility supported by current orderbook and potential higher earnings growth driven by stronger contract flows going forward. Accordingly, we have raised FY10 target PER for these stocks to 16x (from 13x previously).
- Thus, we maintain our Overweight stance on the sector. Our top pick is Wah Seong.
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