This article first appeared in The Edge Financial Daily, on November 16, 2015.
KUALA LUMPUR: The outlook for the oil and gas (O&G) sector remains gloomy, though there may be some opportunities in niche players listed on Bursa Malaysia, said fund managers and analysts.
In a note dated Nov 11, MIDF Research said currently both the International Energy Agency (IEA) and the Organization of the Petroleum Exporting Countries (Opec) are expecting oil prices to only reach US$80 (RM352) per barrel in 2020, with an average of US$5 per barrel increase per year.
“The slowing global demand, higher supply from Opec countries and slower-than-expected falling supply from non-Opec countries are all exerting downward pressure on the oil price, making it unlikely that the price will [see] a spike in the short term,” it said.
For now, MIDF said there is no sign that Opec will cut its supply in order to push oil prices, as members are trying to maintain their market share, which fell from 42% in 2010 to 33% recently.
Year to date (YTD), WTI crude had fallen 21.63% to US$41.75 last Friday.
Fund managers and analysts believe the low oil price scenario does not bode well for O&G-related counters in general.
Phillip Capital Management Sdn Bhd chief investment officer Ang Kok Heng said the sector will be going through challenging times in the next few years as crude oil prices remain low.
“There is no strong reason for investors to buy O&G stocks. It [will be] difficult for O&G stocks to perform over the next two years,” he told The Edge Financial Daily.
Ang said although there may be one or two counters that could outperform, and unless it is for short-term trading (three to six months), or part of a trading strategy, investors should not consider O&G counters just yet.
“Investors can look into O&G players which operate in niche markets or provide niche services that secure long-term contracts. Still, even if they bag contracts, the rates would not be attractive,” he said, noting that Deleum Bhd (fundamental: 1.3; valuation: 2.4) may be one of the counters which fulfils the criteria.
Deleum provides specialised products and services such as power and machinery; oilfield services as well as maintenance, repair and overhaul services for motors, generators, transformers and pumps.
The counter closed at RM1.28 last Friday, with a market capitalisation of RM520 million. YTD, the stock has declined 15.01%.
A local fund manager concurred with Ang that it is not the right time to invest in O&G counters as he foresees limited upside in their share prices.
“Some O&G counters have fallen substantially. The share price is much lower now but there is not much upside for the counters,” he said, adding that the oil price is expected to hover between US$40 and US$55 per barrel.
However, he said investors may want to consider Yinson Holdings Bhd, which has a strong order book.
Yinson provides offshore support services for the upstream O&G sector. It also has a trading and logistics network that has over 200 trucks.
“But there are still risks and concerns as clients may demand a renegotiation of rates,” he said.
YTD, Yinson’s (fundamental: 1.9; valuation: 1.8) share price had risen 8.77% to close at RM2.91 last Friday, with a market cap of RM3.18 billion.
The fund manager pointed to Petronas Chemicals Group Bhd (PetChem) as another counter that is rather resilient in its share price, despite the low oil price scenario.
“Its earnings are not affected by the lower oil price,” he noted.
In its third quarter ended Sept 30, 2015 (3QFY15), PetChem (fundamental: 2.7; valuation: 0.7) posted a net profit of RM916 million, up 38.58% from RM661 million in 3QFY14 due to higher plant utilisation. Revenue rose to RM3.64 billion from RM3.55 billion a year ago.
PetChem shares have risen 23.68% this year, outperforming the FBM KLCI’s 5.81% decline.
PetChem, which makes and sells a diversified range of chemical products, closed at RM6.55 last Friday, with a market cap of RM52.4 billion.
Kenanga Research O&G analyst Sean Lim Ooi Leong noted that there is a lack of catalysts in the O&G sector, with the sector continuing to be on the downside moving forward.
“Overall, O&G-related stocks’ third and fourth quarter earnings remain unexciting,” he told The Edge Financial Daily.
Lim said from a technical point of view, there may be some counters investors can consider trading to take advantage of the volatility in oil prices.
He believed that investors can look into midstream to downstream players, which have secured long-term contracts.
Inter-Pacific Securities Sdn Bhd O&G analyst Brian Yeoh also believed that it is not advisable for investors to invest in O&G stocks for the time being, as he is of the view that oil prices have yet to stabilise.
“I see weakness in demand from China’s weak industrial production data, which fell to a six-month low last month,” he said, adding that the US oil stockpile is still increasing.
He expects the Opec to retain market share by raising production.
In a note dated Nov 9, AmResearch is maintaining “neutral” on the O&G sector, with “buy” calls on Yinson, SapuraKencana Petroleum Bhd (fundamental: 0.65; valuation: 0.8) and Dialog Group Bhd (fundamental: 2.5; valuation: 1.1).
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.