Is it time to buy oil and gas stocks?

SapuraKencana Petroleum Bhd's tender rig T-20 - File pic (Inset Yap Leng Kuen)

IT is often regarded that the best time to accumulate a stock is when nobody is looking at it. Would that hold true for oil and gas [O&G] stocks whose prices have been beaten down in the wake of the collapse of oil prices?

“Yes and no, perhaps one can start looking at certain O&G companies that are not so directly impacted by the oil price and those that are in the brownfield segment,’’ said a senior analyst.

The analyst added that earnings for KNM and Dialog were more tied to jobs related to the massive Refinery and Petrochemical Integrated Development (Rapid) project by Petronas at Pengerang, Johor.

Among its latest jobs, Dialog had joined Petronas and tank storage provider Royal Vopak to undertake the Pengerang Terminal Phase 2 development.

Dialog also owns 46% of the Phase 1 project, Pengerang independent terminal, which is one of the main catalysts in the development of the country’s largest petrochemical complex, Pengerang integrated petroleum complex.

Besides Pengerang, Dialog also has petroleum and petrochemical storage terminals in Kertih and Tanjung Langsat.

“Dialog is in a better position to weather the current low oil prices,’’ said another analyst, adding that the company doesn’t own rigs but is in the rental of land-based tanks for the storage of excess oil.

However, Dialog’s share price is quite high as future earnings are already priced in and many investors are also holding onto their shares.

Meanwhile, KNM’s 70% owned JV company has secured a RM183mil contract to undertake part of the works at the Pengerang integrated complex project in Johor.

“Generally, we avoid O&G but we like the floating, production, storage and offloading [FPSO] segment as its revenues are contractually locked in and its business is cashflow driven,’’ said Vincent Khoo, head of research, UOB Kayhian.

The company in the FPSO segment is Bumi Armada where earnings fell, impacted by rising costs and an impairment charge but Khoo expects new contracts to lift earnings especially for 2017.

“Some small-to-mid cap O&G stocks are worth investing in,’’ said Danny Wong, CEO, Areca Capital.

“These include companies that already have contracts in hand where oil price has limited impact on their earnings.

As the share prices have come off a lot, some of their price earnings (PE) ratios look attractive, especially for those with earnings growth visibility,’’ said Wong.

Citing examples, Wong pointed out that Muhibbah Engineering and Barakah Offshore Petroleum were trading at single digit PEs for 2016.

Muhibbah’s unit and partner VA Tech Wabag Ltd was recently awarded a RM949.6mil contract for the design for the re-feed and engineering, procurement, construction and commissioning of the effluent treatment plant at Rapid in Pengerang.

Barakah reported a drop in second quarterly earnings but Wong is optimistic that its earnings are intact as not all revenue has been recognised yet.

However, for the O&G sector to truly appreciate, oil prices would have to first recover, said Chris Eng, head of research, Etiqa Insurance & Takaful.

“Oil price needs to recover to about US$60 per barrel for the O&G sector to regain its attractiveness,’’ said Pong Teng Siew, head of research, Inter-Pacific Securities.

“There is no hurry to buy O&G stocks as there are issues such as high US dollar denominated loans, weak margins, low orders and difficulty in leasing or chartering vessels.’’

With the Wednesday/Thursday deadline looming for a possible interest rate hike by the US Fed, former World Bank chief economist Joseph Stiglitz said the argument for raising interest rates focuses not on the well-being of workers but financiers.

“In a well-functioning economy, one would have expected the low cost of capital to be the basis of healthy growth.

“In the United States, workers are being asked to sacrifice their livelihoods and well-being to protect well-heeled financiers from the consequences of their own recklessness.

“The Fed should simultaneously stimulate the economy and tame the financial markets. Good regulation means more than just preventing the banking sector from harming the rest of us.

“It also means adopting and enforcing rules that restrict the flow of funds into speculation and encourage the financial sector to play the constructive role in our economy that it should, by providing capital to establish new firms and enable successful companies to expand,’’ wrote Stiglitz, who is a professor at Columbia University, in his Project Syndicate column that appeared in The Guardian.

For the first time, European Central Bank (ECB) president Mario Draghi said explicitly that the bond-buying programme may run beyond September 2016 and that the bank may adjust its size and composition, said Reuters.

As it stands, the ECB is buying 60 billion euros (US$66.68bil) per month asset buys, mostly government bonds.

The ECB, which cut its growth and inflation forecasts and left interest rates unchanged, said growth would suffer from fading momentum in emerging markets, particularly China, and falling oil prices could drag the 19-member euro zone back into deflation in coming months, said Reuters.

The fear in stock picking is that if one waits too long, one can be caught unaware when all of a sudden, the stock starts moving and in no time, everyone is in it and it becomes expensive.

In the case of O&G stocks, one can start planning and allocating resources on which stocks to buy and study any outstanding issues that may cloud their prospects.

According to Stiglitz, statements from Fed officials that the US economy has virtually returned to normal are met with derision, as the bulk of the increase in incomes had been going to the top 1% of earners.

Stiglitz stands up for workers’ plight as he points out that real wages for non-supervisory workers in the US have fallen by nearly 0.5%, and is part of a long-term trend that explains why household incomes in the middle of the distribution are lower than they were a quarter-century ago.

All is not well on the Western front as the ECB mulls further stimulants or quantitative easing [QE] in terms of its bond buying programme.

The question is, in time to come as growth issues surface, would it the ECB alone that would be embarking on another round of QE?

Columnist Yap Leng Kuen sees clouds in the world economic horizon.