Oil and gas sector
Maintain neutral: As a result of the fundamental change in the crude oil landscape, this report addresses the impact of the lower crude oil price environment on the companies under our coverage.

For our top picks, we have chosen companies that are not materially affected by the lower crude oil price environment. Our top “buys” are Dialog Group Bhd, SapuraKencana Petroleum Bhd and Bumi Armada Bhd.

The lower crude oil price environment is not new to the global scene. The fundamental reasons for the major swings in crude oil prices are economic, geopolitics, and natural disasters.

These events or situations, given time, will rectify themselves and allow commodity prices to revert to normal, under the given demand and supply situation.

This time, though, it is different. As a result of the US shale oil revolution, we are facing a change in the fundamentals in the dynamics of crude oil supply.

At the moment, it seems that some of the higher cost producers are cutting capital expenditure (capex) or production.

At the same time, it seems that calls from weaker Organisation of the Petroleum Exporting Countries (Opec) members to cut production quotas are also coming into play.

Whatever happens, something has got to give. We believe that crude oil prices will see some positive movements, possibly over the next three to six months, as supply is lowered — either from the higher cost producers or from Opec members cutting production quotas.

We expect the crude oil price to trade in the US$90 (RM301.50) to 100 per barrel (bbl) range, averaging US$95 per bbl over the next 12 to 24 months.

For the 16 stocks under our coverage, we provide investors with sensitivity analyses that not only incorporate different oil price scenarios, but also assumptions of changes in both local and global oil major capex spending.

Oil price movements will have direct impact on exploration and production (E&P) players like SapuraKencana (“buy”, target price (TP): RM5.33) and Dialog (“buy, TP: RM2.25).

The decision on capex spending will affect day rates, availability of future contracts and order book replenishment rates.

These will affect asset operators in the rig and offshore support vessels (OSV) segments, as well as pure service players.

For floating production systems players, while production capex should be relatively sheltered from oil price movements, they could also face project award delays.

Our recommendation is on companies with clear long-term diversification strategies, proven execution track record and niche/top players in oil and gas (O&G) subsectors.

Our pop picks are SapuraKencana, Dialog and Bumi Armada (“buy”, TP: RM2.24), while  Dayang Enterprise Holdings Bhd (“buy”, TP: RM4.52) and Coastal Contracts Bhd (“buy”, TP: RM5.90) remain as our mid- to small-cap top picks. — RHB Research Institute Sdn Bhd, Nov 14

This article first appeared in The Edge Financial Daily, on November 17, 2014.