AmInvestment stays cautious on energy sector as demand recovery may face roadblocks for rest of 2020

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KUALA LUMPUR (Aug 12): AmInvestment Bank Research said while improving sentiments have driven the energy stock rally, it remains cautious on a sector turnaround given that demand recovery may face roadblocks over the rest of the year on rising Covid 19 cases.

In a note today, AmInvestment analyst Alex Goh highlighted that the Bursa Malaysia Energy Index rose 12.3% to 861.5 points yesterday on a surge of retail buying which ballooned trading volume to 7.7 billion, as Brent crude oil prices briefly climbed above the US$45 per barrel threshold.

“For stocks under our coverage, Sapura Energy Bhd stocks jumped 45%, Bumi Armada Bhd 22%, Velesto Energy Bhd 14% and Serba Dinamik Holdings Bhd 3%,” Goh added.

The optimism on oil prices comes on the back of hopes for progress in Covid-19 vaccine trials, a weaker US dollar, the possibility of another US economic stimulus package that can boost demand, Goh added.

However, he said even though a measure of optimism has returned for crude oil prices, he expects oil producers to proceed with their planned production cuts for this year given that demand globally remains depressed amid the prolonged Covid-19 movement restrictions and physical distancing measures across the new normal which could mean potentially long-term changes in energy usage.

The analyst cited Petroliam Nasional Bhd (Petronas), Exxon Mobil, Royal Dutch Shell, Saudi Aramco and Petrobras as national oil companies that have slashed capital expenditure this year, adding that new contract awards to Malaysian operators dropped 62% year-on-year to RM2.2 billion for 1H2020 with worse to come in 2H2020.

“Against the backdrop of a sharp demand drop in upstream oil services, we remain cautious on companies with high gearing levels such as Sapura Energy, which needs to restructure its RM10 billion debt by the end of this year,” Goh said.

“Dialog Group Bhd and Serba Dinamik are ‘buy’ calls due to their resilient non-cyclical tank terminal and maintenance-based operations while Petronas Chemicals Group has a high correlation to the recent oil price upturn.

“However, as we continue to view the still low oil prices and earnings of upstream service companies to be worse than the previous 2015–2017 down cycle which led to multiple financial distresses to oil and gas (O&G) corporations, we retain our ‘sell’ calls for Bumi Armada, Sapura Energy and Velesto Energy,” Goh concluded.

At 10.12am, Bursa’s Energy Index has fallen 56.6 points or 6.57% to 804.91 points. Sapura Energy Bhd, the most active energy counter, dipped two sen or 13.79% to 12.5 sen after rising to a five-month high of 14.5 sen yesterday.

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