This article first appeared in The Edge Financial Daily on July 2, 2019

Oil and gas sector
Maintain neutral: A production cut extension is widely expected by the market. However, the 1.2 million barrels per day cut is positive, considering we had expected a small cut in view of the current rebalanced oil market. On the flip side, this reflects Saudi Arabia’s and Russia’s concerns over global supply and demand dynamics moving into 2020 as a result of rising US output, albeit seeing a slower growth, but more importantly the worrying global economic growth.

Notwithstanding, news of extending the deal will likely see Brent global oil prices trend higher towards the upper range of our second half of 2019 (2H19) oil price forecasts of US$65 (RM269.10) to US$70 per barrel in the near term. A temporary truce between the US and China may also lend support to global oil prices as negative sentiments over global demand concerns ease temporarily. Higher oil prices will likely sustain work activities for 2H19 as well, potentially leading to a better oil and gas (O&G) sector earnings growth.

The renewed positive factors, driven by the production cut extension and the US-China truce, will likely draw some interests back into the sector. We still favour companies with promising earnings growth prospects such as Petronas Chemicals Group Bhd with a “buy” rating and a target price (TP) of RM10.10, with the Refinery and Petrochemical Integrated Development project expected to increase the current capacity by 15%; and Serba Dinamik Holdings Bhd (buy; TP: RM5.50) with its record high order book of RM8.7 billion. We also like Velesto Energy Bhd (buy; TP: 40 sen) given a recovery in drilling rig outlook, and Kelington Group Bhd (buy; TP: RM1.72) with its liquid carbon dioxide plant’s commencement being a catalyst. — Affin Hwang Capital, July 1