THE 30% decline in Brent crude oil price from US$115 a barrel in June to last Friday’s US$87 will see some quarters benefit while others falter. For almost four years, it has been stable at about US$110 a barrel.

The price drop has been caused by rising shale gas production in the US, lower demand by developed countries and slower growth in China.

The decline in oil prices is placing oil exporters, producers and governments in the losers’ group as they may see significant revenue shortfalls if the situation persists.

Oil exporters and producers are expected to see their revenue and profits sliced as their upstream divisions earn less from the oil they produce.

Also, governments that rely on oil revenue for economic growth are expected to be affected by lower oil prices as they would see decreased contributions from their oil and gas (O&G) sectors.

If Brent falls to US$80 a barrel, for example, market observers project the Organization of the Petroleum Exporting Countries to lose some US$200 billion of their earnings, which came in at US$1 trillion in 2012, while oil producers are at risk of seeing their margins squeezed.

This includes forcing the oil-producing countries in the Middle East, Russia and the US to brace themselves for lower revenue projections.

Specifically for the US, declining oil prices could also potentially see the slowing of its shale revolution due to reductions in capital expenditure for production.

While some view the plunge in oil prices as alarming, crude oil at US$87 per barrel puts importers, oil companies with refining operations and the aviation industry in the winning pool.  

Large net importers of oil, such as China and India, are expected to benefit from lower crude oil prices as the current O&G environment allows them to buy the commodity at a much lower price compared with that in June.

Last year, the US continued to the largest net oil importer, buying some 6.6 million barrels of oil per day (mbopd). China followed with 6.2 mbopd, Japan, 4.4 mbopd, and India, 2.7 mbopd, according to the US Energy Information Administration.

The aviation industry, which sees about 40% of its operating cost weighed by fuel expenses, is another group to benefit from declining oil prices.

CIMB Investment Bank Research’s Gan Jian Bo says the aviation industry may expect its operating costs to decline as oil prices fall. He adds that the actual impact of lower oil prices on airline companies will only be seen in their next quarterly results. He has a “neutral” call on the sector, with an “add” rating for AirAsia Bhd and a “hold” for Malaysia Airports Holdings Bhd.

Last month, Gan raised his target price for AirAsia to RM3.25. The low-cost carrier operator closed at RM2.31 last Friday.

Meanwhile, integrated oil companies with refining operations can expect this segment of their business to soar during the period of cheaper oil.

Locally, lower oil prices have caused uncertainty in the market, resulting in investors and fund managers selling down O&G stocks amid worry that these counters are overvalued following growing investor interest in the last few years.  

Among the stocks that have fallen as high as 22% since August are Yinson Holdings Bhd, Coastal Contracts Bhd, Bumi Armada Bhd, UMW Oil and Gas Bhd and SapuraKencana Petroleum Bhd.

However, last week, industry analysts reiterated their positive views on O&G stocks, which have plunged significantly and now have a lucrative entry point.

CIMB IB Research’s Norziana Mohd Inon says investors should “accumulate UMW Oil and Gas Bhd following the recent share price correction”, giving the counter a target price of RM5.11.

Last Friday, several O&G companies saw their share prices rebound. UMW Oil and Gas rose 4.32% to RM3.38, TH Heavy Engineering Bhd (+6.36% to 58.5 sen), SapuraKencana (+9.81% to RM3.47), Barakah Offshore Petroleum Bhd (+6.54% to RM1.14), Yinson (+5.35% to RM2.56) and KNM Group Bhd (+7.19% to 74.5 sen).

While transport companies and consumers would usually benefit from lower oil prices, this is not the case for Malaysia, given the government’s subsidy rationalisation programme. On Oct 1, the government cut the fuel subsidy, leading to a 20-sen increase in the retail prices of RON95 petrol and diesel. This translates into a rise of 8.7% for RON95 and 9.1% for diesel.

This article first appeared in The Edge Malaysia Weekly, on October 20 - 26, 2014.

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