Oil and gas sector
Maintain neutral with unchanged oil price forecast of US$55 (RM204.05) per barrel: We maintain our 2015 estimated Brent crude oil price forecast of US$55 per barrel and “neutral” rating on the sector.

We opine that the weak prevailing oil price will result in a drop in global oil and gas (O&G) capital expenditure and weaken companies’ earnings.

The share prices of O&G companies have fallen sharply over the past months and the current stock valuations of 10 to 15 times price-earnings ratios (PERs) are, in our view, a fair reflection of the current market conditions.

Saudi Arabia-led airstrikes against rebel forces in Yemen last Thursday have heightened the geopolitical risk in the Middle East, resulting in a 4.8% spike in Brent crude to US$59.19 per barrel (last Thursday). Brent ended last week off its high at US$56.41 (RM209.28) per barrel (+2% week-on-week).

Yemen is a smallish oil producer (100,000 barrels per day) and the turmoil will have limited impact on global oil supply. While the security of the Gulf of Aden trade route may be affected by the crisis, the impact will be partly mitigated by the strong presence of American, French and Nato fleets in the region.

Overall, we opine that the crisis may trigger some short-term spikes in oil price, but the overall weak oil market fundamentals will continue to weigh down medium-term oil prices.

We note that domestic O&G share prices have a strong correlation with oil prices.

Hence, the spikes in oil prices (if triggered by the Middle East crisis) will lift investor sentiment and may rerate the stocks’ valuation to their average PER. SapuraKencana Petroleum Bhd, Bumi Armada Bhd, and Alam Maritim Resources Bhd offer the highest upside. That said, we caution that these spikes will likely be short-lived as the global oil market is still flush with abundant supply of crude oil.

The key upside risk to our “neutral” sector rating is an escalation of the crisis in the Middle East that would lead to a substantial supply disruption. Downside risk is lower-than-expected domestic oil and gas contract flows. — AffinHwang Capital Research, March 30

This article first appeared in The Edge Financial Daily, on March 31, 2015.