Sector update:
Regional Oil&Gas (Overweight),
Screening For The Strongest Companies
Regional Oil&Gas (Overweight),
Screening For The Strongest Companies
We assess the
strength of the 30 oil & gas stocks under our coverage from across four
countries. Using liquidity and solvency ratios we identified firms that
were/are financially strong over the 2013-2016F period. The results should not
come as a surprise. Those that remained financially strong were in the
downstream and midstream subsectors, with concentration being in Thailand and
Malaysia. We like to highlight Petronas Chemicals, which stands out in all
ratios as the most financially strong company within our oil & gas
universe.
¨
The
key take away
here is that, due to prudent financial management, all of the strongest
companies have D/E ratios of <0.5x while remaining highly liquid throughout
the period under observation. Apart from prudent financial management, we
attribute their strength to the business models that they have adopted, ie
these firms are in the subsectors that directly and indirectly benefit from the
low oil price environment. The refineries and petrochemicals sectors are
spread-takers, the oil & gas contractors benefit from Petronas’ downstream
expansion plans, and the midstream players benefit from the oil oversupply via
higher tanker and storage demand. Finally, the retail and wholesale
distributors benefit from higher fuel consumption.
¨
Malaysia.
The
midstream and downstream players like Dialog (DLG MK, BUY, TP: MYR1.82), MISC
(MISC MK, BUY, TP: MYR8.82) and Petronas Chemicals have remained financially
strong over the period under observation. The other companies that have
remained financially strong throughout the period are Muhibbah Engineering
(MUHI MK, BUY, TP: MYR3.75), Malaysia Marine & Heavy Engineering (MMHE MK,
NEUTRAL, TP: MYR1.07) and Favelle Favco (FFB MK, NEUTRAL, TP: MYR2.95). The
latter three are involved in the construction business in offshore & marine
and downstream segments.
¨
Thailand.
It
is the PTT group – PTT, PTT Global Chemical (PTTGC), PTT Exploration &
Production (PTTEP) (PTTEP TB, NEUTRAL, TP: THB85.00), Thai Oil and Bangchak
Petroleum – that was financially strong throughout the period. IRPC’s financial
strength improved over this same period too. PTTEP, although a pure exploration
& production (E&P) player, benefits from its low D/E (0.3x) and
managements’ constant cost-cutting measures. Again prudent management in both
financial and operations remains key throughout the entire group.
¨
Indonesia.
The
financial positions of three companies improved over the period under
observation, ie AKR Corporindo (AKR), Perusahaan Gas Negara (PGN) and Rukun
Raharja (RAJA IJ, BUY, TP: IDR425). All these companies saw D/E at a much lower
0.6-0.8x in 2016F vs to 1.1-1.3x in 2013. Its liquidity ratios all improved
significantly as well.
¨ The weakest companies are those in the upstream oil & gas subsector. Such firms have seen their financial positions deteriorate over the period under review. Without exception, all companies in the upstream, offshore support vessel (OSV) chartering/operations & maintenance (O&M) construction, rig builders and pure upstream E&P companies also saw a deterioration in their financial positions in this period. As cash-generating abilities in the upstream sector weaken, so do companies’ liquidity. If prolonged, solvency will be questionable. Within our universe, there are nine companies that have D/Es of 1x or higher as at 2016, up from six companies in 2013.
¨ The weakest companies are those in the upstream oil & gas subsector. Such firms have seen their financial positions deteriorate over the period under review. Without exception, all companies in the upstream, offshore support vessel (OSV) chartering/operations & maintenance (O&M) construction, rig builders and pure upstream E&P companies also saw a deterioration in their financial positions in this period. As cash-generating abilities in the upstream sector weaken, so do companies’ liquidity. If prolonged, solvency will be questionable. Within our universe, there are nine companies that have D/Es of 1x or higher as at 2016, up from six companies in 2013.
Best regards,
Kannika Siamwalla,
CFA
Head of Regional Oil
& Gas
RHB Securities
(Thailand) PCL.
