KUALA LUMPUR: Despite the sharp fall in crude oil prices, investment analysts believe that companies which have secured contracts should be able to weather the possible slowdown in the industry.
Kenanga Research believes that certain oil and gas (O&G) stocks offer good bottom-fishing opportunities as values have started to emerge even after earnings downgrades. Its picks are Dayang Enterprise Holdings Bhd, Barakah Offshore Petroleum Bhd, Perdana Petroleum Bhd and SapuraKencana Petroleum Bhd.
Kenanga Research has ruled out the possibility of crude oil hitting US$40 (RM137) to US$50 per barrel as per market talks. “This is because our simulation study reveals that the probability for it dipping below US$60 per barrel is remote with a probability of less than 10%,” it added.
AllianceDBS Research analyst Arhnue Tan said earnings of O&G companies had met expectations in the recently concluded results season for the quarter ended Sept 30.
She expects corporate fourth-quarter (4Q) earnings to remain intact as most of the companies have secured contracts which will be realised in 4Q14.
“Our earlier forecast on the O&G sector remains unchanged in the short term,” Tan told The Edge Financial Daily yesterday. Nonetheless, she noted that she is still working on the new valuations for the sector for 2015 in view of the plunge in oil prices.
Tan is advising investors to pick stocks that have strong fundamentals or heavily sold down O&G stocks such as SapuraKencana Petroleum, Dialog Group Bhd and Bumi Armada Bhd to capitalise on the recent sharp decline in their stock prices.
“These counters are fairly strong fundamentally and have large order books which may help them to pull through the difficult operating times.
“Furthermore, these counters have a long-term earnings visibility and they are more resilient compared with other counters,” she added.
But Tan remained cautious about the sector as she believes a recovery would not be immediate. “As of now, I maintain a ‘neutral’ rating on the sector as there is no exact time frame for the recovery in crude oil.”
O&G stocks regained some lost ground yesterday after the heavy selldown on Monday. Beaten-down shares such as Petroliam Nasional Bhd (Petronas)-related stocks led the rebound, with Petronas Chemical Group Bhd emerging as the top gainer, up 7.21% to close at the day’s high of RM5.50 after falling 8.88% or 50 sen the day before. The FBM KLCI also recovered, rising 0.4% to 1,785.97 points yesterday.
According to Reuters, Brent was unchanged at US$72.54 yesterday, while US crude was down 40 cents to US$68.60 a barrel.
In its strategy report yesterday, CIMB Research head Terence Wong said it remains positive on the O&G sector, which should be a major winner riding on the Economic Transformation Programme (ETP) spending despite the 15% to 20% cutback in Petronas’ spending next year.
“Assuming that our earlier forecast for Petronas’ capital expenditure (capex) in 2015 of RM60 billion (based on its average capex in 2012 and 2013) will be lowered by RM9 billion to RM12 billion to RM48 billion to RM51 billion, this will still be the highest annual capex prior to the implementation of the ETP.
“It also appears that the capex reduction will affect the downstream segment more than upstream, which forms the bulk of Petronas’ net profit and where most of the companies under our coverage operate,” said Wong.
He noted that the companies under CIMB Research’s coverage are mostly service providers, which “are sticking to their growth plans, even eyeing merger and acquisition opportunities as the sluggish market has thrown up attractive valuations”.
“Their order books, over the next two years at least, are intact as they are based on committed capex.
“Furthermore, the contractual terms and rates are not tied to oil prices,” he said, adding that it maintains an “overweight” stance on the sector.
Its top picks are SapuraKencana among the big caps and Perdana Petroleum among the small caps.
This article first appeared in The Edge Financial Daily, on December 3, 2014.