Is it time to bet on O&G?

This article first appeared in The Edge Financial Daily, on June 18, 2018.
-A +A

KUALA LUMPUR: With the stock market, particularly construction counters, roiled by major policy changes under the new Pakatan Harapan administration, the oil and gas (O&G) sector may be ripe for a relook as crude oil prices have been maintained at fairly decent levels.

Pong Teng Siew, the head of research of Inter-Pacific Securities Sdn Bhd, told The Edge Financial Daily there could be selective gems, especially in the O&G space, which could benefit from stronger oil prices as the worst appears to have passed.

Recent financial results pointed to an improvement, and for some even a turnaround in their performance.

Velesto Energy Bhd is one, posting a net profit of RM5 million for the first quarter ended March 31, 2018, compared to a net loss of RM104.1 million in the corresponding quarter a year ago. In the preceeding quarter ended December, its loss was a whopping RM980.5 million.

“For Velesto, things will continue to improve as they continue their cost rationalisation and utilisation increases. I believe second-quarter utilisation should be between 70% and 80% and second-half utilisation will likely be more than 90%,” said Abel Goon, an analyst with TA Securities.

Goon, who also covers Dagang NeXchange Bhd (DNeX), said the company’s earnings growth is likely to continue as its more recent acquisitions begin to deliver, including the order flow from production sharing contracts, as well as the development of the 1Trade system — a web-based one-stop portal for cargo and trade management.

He observed that improved oil prices would also benefit DNeX’s associate Ping Petroleum as its “Anasuria cluster is directly exposed to oil prices”.

The research arm of Rakuten Trade Sdn Bhd, which has upgraded the target price of one of the largest oil bunkering players in Malaysia, Straits Inter Logistics Bhd, has also observed that the O&G sector is expected to see increased activities, which would bode well for the company.

Another O&G analyst also pointed out that the sector has seen emerging interest among investors as oil prices have made steady gains towards US$70 (RM278.60) per barrel this year, and have stayed above the level amid uncertainties involving Opec’s decision to increase production. More clarity is expected after the Opec meeting on Friday.

“If you look at the Bursa [Malaysia] stock exchange, you’ll notice heavy volume and trading in the oil and gas space as the appetite for risk in the energy sector has returned. Most of these counters are still relatively volatile at this point given some of the uncertainties ahead of the Opec meeting. But there’s definitely an improved sentiment and renewed optimism in this space,” said the analyst who wanted to remain unnamed as he is not the spokesperson for the asset management firm.

The analyst also pointed out that most O&G companies listed in Malaysia do not benefit directly from the increase in oil prices but from the increase in activities.

“In recent months, we see that some tenders for projects have been reopened and some contracts have been awarded. Of course, the companies are still cautious with their capex (capital expenditure) but things have definitely improved. Let’s not forget that it has been close to four years since oil prices collapsed in 2014.”

In the stock market selldown in the aftermath of Pakatan Harapan’s shock victory in the 14th general election on May 9, O&G counters were not spared the turmoil.

A number of them have seen a significant price fall, including Uzma Bhd, which has plunged 17% to RM1.12.

Floating, production, storage and offloading player Bumi Armada Bhd has lost 12.73% to 72 sen, while Sapura Energy Bhd has seen a slight decline of 2.99% to 65 sen.

More resilient O&G counters include Dialog Group Bhd, Hibiscus Petroleum Bhd, DNeX and Velesto Energy — formerly known as UMW Oil & Gas Corp Bhd.

To some extent, the decline of the counters was due to concerns that falling global crude inventories and rising consumer prices would prompt Saudi Arabia and Russia to pump more crude.

Owing to the uncertainties, oil prices had fallen from a 3½-year high of US$80.50 per barrel to US$76.50 as of last Thursday.

With Opec set to meet on Friday, oil prices are likely to see some downward pressure, given that Saudi Arabia and Russia have indicated that they would likely push for higher production ceilings at the meeting.

Still, Goldman Sachs does not think that the oil rally is over.

According to reports, the investment bank has forecast brent crude to average US$82.50 per barrel in the third quarter of the year, with upside risk to the projection for the rest of the year and “skewed to further upside” next year.