O&G in the realm of uncertainty

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Oil and gas sector
Maintain “overweight”:
The recent plunge in crude oil price has caused some uneasiness among investors as seen from the recent selldown in most oil and gas (O&G) counters. Despite the fundamental outlook for crude oil continues to point to lower prices, we reckon traders may be unwillingly selling at these already-depressed levels, especially as the supply-side risks remain elevated due to the ongoing situation in the Middle East.

Technically, we expect oil prices to remain at current levels and we believe a near-term bottom may have already been formed. We envisage prevailing fundamentals to support our local players especially with Petroliam Nasional Bhd’s anticipated capital expenditure. Fundamentally, earnings visibility and solid order books would be the dominant factors for our “buy” list.

Brent crude has been showing a bearish trend since early June, hitting multi-records low over the months falling by more than 30% from its highest US dollar 115 level. The situation is exacerbated by the poor growth outlook in both Europe and China along with the heightening supplies. Adding to the uncertainty, Saudi Arabia has mentioned earlier that it is comfortable with the current low crude price, as the current level would discourage and more hefty investments thus slowing the expansion of the rest of the oil producers.

Ahead of the result next month, we have relooked at our stock coverage and revised our target price (TP) for both Malaysia Marine and Heavy Engineering Holdings Bhd (TP: RM2.60) and Dayang Enterprise Holdings Bhd (TP: RM4.15) , with the rest of our coverage Dialog Group Bhd (TP: RM1.83), Uzma Bhd (TP: RM4.08), Scomi Energy Services Bhd (TP: RM0.92), UMW Oil & Gas Corp Bhd (TP: RM4.31) and Wah Seong Corp Bhd (TP: RM2.20) remain unchanged. We have recently reinitiated our coverage on Barakah Offshore Petroleum Bhd (TP: RM1.30).

Note that most stocks under our coverage have “buy” signals due to the recent market selldown and see the recent retracement as a good opportunity to bargain hunt and we would recommend investors to accumulate on stocks with strong earnings visibility and order books. — BIMB Securities Research

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This article first appeared in The Edge Financial Daily, on November 4, 2014.