No rush into O&G sector

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KUALA LUMPUR: Crude oil prices have rebounded to above US$60 (RM215.40) per barrel but that has not made the oil and gas (O&G) sector appealing to investors and investment analysts.

Analysts who track the O&G sector expect volatility in crude oil prices to continue.  Some O&G-related stocks have climbed in line with the higher oil prices in the past few weeks but many are not convinced that the upward trend could be sustainable.

At press time, Brent crude was trading at US$67.68, and West Texas Intermediate crude was at US$60.78. The prices have gained more than 20% of their value since bottoming out earlier this year.

However, crude oil prices are still relatively low compared with where they were at — above US$100 — before the plunge in October last year.

Some quarters are of the view that it is only when crude oil prices climb back to US$75 or above and stay at the level for a while, then there will be rays of hope that oil majors will be more aggressive in exploration and production activities.

AllianceDBS Research analyst Arhnue Tan said O&G stocks would be a “good buy” now only if investors are taking a long-term stance of more than 12 months.

“My advice to investors: Do not rush in. We are feeling cautious,” she told The Edge Financial Daily by phone.

Tan acknowledged that the current market sentiment may be buoyed by higher crude oil prices. However, it might be dampened by the first-quarter financial results that are being released in May.

SapuraKencana Petroleum Bhd (fundamental: 1.3; valuation: 1.4) and Dayang Enterprise Holdings Bhd (fundamental: 2.7; valuation: 2.1) are on her recommendation list for the strong order book, good earnings visibility and diversified model. 

She also likes Bumi Armada Bhd for its floating production, storage and offloading construction job, which will be earnings accretive.

AllianceDBS puts its estimates at US$55 to US$65 per barrel while MIDF Research is projecting crude oil prices to average between US$60 and US$70 per barrel this year.

According to MIDF Research analyst Aaron Tan, O&G stocks may not be attractive now as some of the share prices have risen over the last few weeks. “It was probably a good buy a few weeks ago,” he told The Edge Financial Daily.

He noted that market perception is still strong on the correlation between crude oil prices and O&G stocks. “The perception should not be disregarded, although it seems to be simplistic that higher oil prices will lead to more big contracts being dished out,” he said.


The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Go to www.theedgemarkets.com for more details on a company’s financial dashboard.

 

This article first appeared in The Edge Financial Daily, on May 8, 2015.