OIL AND GAS (O&G) stocks are unlikely to command the premiums they enjoyed. There is growing belief that crude oil prices are in a new trading era of US$70 to U$80 per barrel. This is in stark contrast to the past two years, when O&G was the economy’s star sector.
On the flipside, there are bargain O&G stocks to be picked up on Bursa Malaysia. Valuations may be even more attractive should there be a few more rounds of selling before the dust settles.
Last Monday alone, Bursa saw at least RM16.52 billion of market capitalisation in O&G stocks evaporate after the Organization of the Petroleum Exporting Countries (Opec) decided not to cut production.
Petroliam Nasional Bhd (Petronas) president and CEO Tan Sri Shamsul Azhar Abbas’ remark about cutting the national oil firm’s capex for next year added weight to the plunge.
The sharp fall in O&G stocks caused the FBMKLCI to tumble 2.34% to 1,778.27 points, its worst drop since Jan 18, 2013. All 37 companies with core businesses related to the O&G industry fell, some by double-digit percentages.
Offshore drilling service providers saw the heaviest fall last Monday. UMW Oil & Gas Corp Bhd lost 17.67% of its value to end at RM2.33, while Perisai Petroleum Teknologi Bhd shed 19.26% to 54.5 sen. An analyst says Petronas’ capex cut could negatively impact exploration and drilling players.
Since October this year, SapuraKencana Petroleum Bhd has lost RM9.71 billion of market cap; Bumi Armada Bhd, RM4.87 billion; Dialog Group Bhd, RM1.77 billion; Petronas Dagangan Bhd RM3.06 billion; and UMW Oil & Gas Bhd, RM2.94 billion.
As the O&G operating environment becomes tougher, companies with strong balance sheets and clear earnings visibility over the next three years will tend to stand out.
In fact, there is still activity in the sector. Last Friday, SapuraKencana announced it had obtained eight contracts and contract renewals worth RM1.58 billion from various clients.
The recent selldown has pushed O&G counters to a level of price-earnings multiples not seen since the global financial crisis in 2009.
“We’re not in another financial crisis, for sure. Now, the depressed prices are due to oversupply, and they’re much higher than during the last crisis. Looking at the historical valuations, O&G stocks were traded at eight to nine times their price-earnings ratio,” says an insurance fund manager.
After the onset of the global credit crunch in September 2008, crude oil prices plunged from a peak of US$146.08 to US$40. By comparison, Brent was traded at US$69.15 per barrel, and WTI, at US$66.30 per barrel, at the time of writing last Friday.
AllianceDBS Research analyst Arhnue Tan tells The Edge that she is now valuing big-cap O&G stocks’ target prices at forward price-earnings ratios in the mid-teens, while mid-caps are ascribed price-earnings multiples in the low-teens.
These valuations are at least 40% lower than the forward 20 times price-earnings ratios (or more) that O&G stocks used to command. However, AllianceDBS’s current band of earnings multiples is still higher than the range seen during the global financial crisis.
Analysts and fund managers also say that downstream players could be less affected by depressed oil prices. One name in the subsector that comes to mind is Dialog.
“There might be higher volumes of oil stored at Dialog’s Pengerang independent deepwater petroleum terminal when prices are lower,” says a fund manager.
However, an analyst says that it might be premature to say so, as it all hinges on demand for oil. Bloomberg data, however, shows that analysts still favour Dialog, with nine of 17 recommending a “buy” at an average target price of RM1.71. The counter closed at RM1.35 last Friday.
While fund managers and analysts think there could be buying opportunities in some of the battered blue chips, they say it might take at least six months for investors’ sentiment on the O&G industry to recover, so long as oil prices have stabilised.
“It is still unclear what contract flows will be like next year. The upstream players that rely mostly on Petronas projects could be badly hurt. Once oil prices recover to US$70 or above (Petronas’ production cost is estimated at US$65 a barrel), investors might warm up again to O&G stocks. Right now, it’s just too unpredictable to look into a lot of the mid-caps,” a fund manager says.
RHB Research Institute projects that Brent crude could fall to as low as US$60 in the next six months. However, it estimates that the price could recover to between US$90 and US$100 per barrel in 12 to 24 months.
Big-cap SapuraKencana is the top recommendation of O&G analysts given its depressed valuations. After losing more than 20.06% in market value in just four weeks, SapuraKencana was traded at a forward price-earnings multiple of 10.64 times, according to Blommberg.
SapuraKencana has an order book value of RM26.8 billion, equivalent to 3.2 times its FY2014 revenue. SapuraKencana vice-chairman Tan Sri Mokhzani Mahathir bought three million shares last week in a move seen by O&G bulls as a sign of confidence in the group.
The same could be said for Bumi Armada, which fell to an all-time low of 98 sen last Monday. Although Hassan Basma, who stepped down as CEO last Friday, had been trimming his stake in the fifth-largest floating production and storage offloading (FPSO) provider in the world, former deputy chairman Datuk Ahmad Fuad Md Ali and Datuk Abdul Farish Abd Rashid bought more Bumi Armada shares after the O&G rout last Monday.
Bumi Armada has declined by 57.5% to date this year. In a note, MIDF Research says that Bumi Armada’s order book stood at RM21.8 billion, with extension options amounting to RM11.8 billion.
“We believe Bumi Armada will be able to weather the storm as the large portion of its order book consists of fixed long-term FPSO contracts with extension options and only 9% consists of OSV contracts,” the research house said.
In the first nine months of its financial year ending Dec 31, 2014, Bumi Armada’s net profit of RM271.25 million was 20.89% lower year-on-year. In an earlier interview with The Edge, Hassan explained that the drop was due to a change in the accounting treatment of the company’s assets, from operating lease to finance lease, since the beginning of this year. The change means earnings from its FPSO business are recognised progressively.
In a note last Thursday, AllianceDBS’s Tan said Dayang Enterprise’s sole focus on the offshore brownfield segment shields the company from volatility in crude oil prices.
“Dayang Enterprise’s earnings will remain resilient even during periods of weak crude oil prices. This is because brownfield activities would be ongoing to sustain offshore production. To recap, the group’s earnings were also resilient during the 2008/09 financial crisis.”
This article first appeared in The Edge Malaysia Weekly, on December 8 - 14, 2014.
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