KUALA LUMPUR (June 30): AffinHwang Capital Research has upgraded their stance on the oil and gas (O&G) sector to “Neutral”  (from Underweight) following the improved risk-reward trade-off from falling oil prices.

“We believe the sector’s current valuation of 15 times forward price to earnings (PE) is reasonable, comparable to the KLCI PE,” analyst Isaac Chow said in a sector update today.

The upgraded position follows a 6% decline month-on-month in oil prices.

The research house maintained its earnings forecast and target prices for all oil & gas companies under their coverage but upgraded Alam Maritim Resources Bhd (AMRB) and Petra Energy Bhd (PENB) to “Buy” on their share price weakness.

“We like big caps with resilient earnings such as Bumi Armada Bhd and small caps that are trading below book value such as AMRB and PENB as possible merger and acquisition (M&A) targets,” they added, recommending investors to keep an eye on price weakness.

“We expect investors to shift their focus from oil price movement to companies’ earnings trends and possible M&A opportunities for the second half of 2015 (2H15).”

It expected oil and gas services providers to have better visibility in their business prospects, having finished revising their expansion strategy based on the lower oil price environment.

The research house noted that correlations between oil prices and the sector’s stock prices have not been strong historically and have recently fallen.