KUALA LUMPUR: As oil prices continue to slide — the Brent crude hit a five-year-low of below US$66 (RM230) per barrel yesterday — analysts and fund managers foresee that the selling pressure on local oil and gas (O&G) counters will not be abating just yet.
There could be another round of selling pressure among investors with short- to medium-term view of up to six months, especially on financially weaker O&G companies, said Affin Hwang Asset Management Bhd head of equity Gan Eng Peng.
“The rationale behind this is that we have only seen about two months of price deterioration of oil, but in terms of business deterioration, it is only starting now. Financial results going forward will be severe for those exposed to the vagaries of oil price and O&G capital expenditure,” he told The Edge Financial Daily yesterday.
“This is a naturally highly-geared industry. I would imagine access to funding now will be challenging from an equity, bond and loan perspective, even if oil stays at the US$65 level. Even among O&G companies, some will start worrying about counterparty risk.”
Investors with heavy O&G positions must think through if they are willing to sit through more pain, Gan said.
For investors with no position — which Gan deems unlikely given how prevalent the sector has been across Malaysia — he noted that it is “okay” to have some exposure to some of the stronger names, especially those with secured contracts.
“But investors will need to sit through some large swing in share prices given the changing nature of the industry and have at least a one-year time horizon to see through the down cycle.”
Gan is of the view that the call on oil price — which will still determine the sector in the near term — has been very unreliable and difficult due to the many moving parts along the O&G chain.
“One needs to predict government policy, global supply and demand, financial speculation and currency movements to come to a conclusion on oil price. The fact that 99% of the industry got its forecast wrong on oil price less than six months ago tells you how hard it is to predict the point where oil price will bottom out,” he pointed out.
Gan thinks the oil price is unlikely to fall to US$40. But even if it does, he noted that it is hard to imagine it will stay so for long as there will be a lot of supply disruptions at that level and that the market will adjust itself within a year.
Danny Chan, senior analyst of UOB Kay Hian Research, is also of the view that there may still be some selldowns in the near term — at least for another month — as crude oil “has not really found its stabilising point”.
“Based on the stringent trial analysis we did — where we really stressed the potential earnings downside for some of the stocks under our coverage (applying a down-cycle price to earnings of 8-10 times) — we find Bumi Armada Bhd, Perisai Petroleum Teknologi Bhd, Barakah Offshore Petroleum Bhd and Deleum Bhd trading close to their trough and believe their business models to be quite safe,” he said.
However, he was also quick to add that investors would still need to sit through a period of short-term volatility.
On views that the Organization of the Petroleum Exporting Countries wants to keep oil prices of between US$60 and US$70 per barrel levels, Chan does not discount prices to trade further downwards to US$60 per barrel.
“Some investors would offload positions ahead of uncertainties and sit on the sidelines for another quarter perhaps,” he said.
Brent crude for January 2015 delivery fell to as low as US$65.29 yesterday, its weakest since September 2009.
This article first appeared in The Edge Financial Daily, on December 10, 2014.