But analysts aren’t too excited about the rally in oil gas stocks


  • Business
  • Tuesday, 23 Sep 2003

EXPECTATIONS are that oil and gas companies are going to make tons of money and subsequently see their share price surge to stratospheric levels. This sort of outlook of an industry is, in a way, not new. 

Many other companies in different industries in the past have spun a similar story of potential and wealth. Three years ago, it was the dotcom and tech companies. We were told that clicks would replace bricks and unless companies adapt, they would be out of business. 

Years before that, bubbles of euphoria centred on banks, property companies, construction counters, timber stocks and the China play. 

“It is like I have seen everything about three different times but with different actors,'' said the head of research of a local stockbroking company. 

“Bubbles always grow bigger when the market is bullish. They pop when the market turns.'' 

There was no lack of analysts pouring cold water over the robust outlook on the sector but none of them wanted to be identified.  

The story of the oil and gas sector is the latest in a series of theme plays, which this time around, is fuelled by high oil prices, promise of more exploration and production activity, big oil discoveries and a second oil consortium to explore marginal oilfields. 

The rally in the oil and gas counters also coincided with a rally in such stocks globally after the price of oil rose with the end of Iraq war. 

While oil and gas stocks, which until the past few months have been largely ignored by the market, have their supporters, others do not believe the story. 

They say the industry is highly cyclical; where companies make good money for a couple of years, only to be followed by lean times. 

When oil prices soften, which happened recently, many companies would scale back not only their production but also search for new oilfields, as weak crude prices would make whatever exploration work less feasible. 

The assumption that local companies would bag a hatful of contracts, they say, could be flawed as the award of contracts remain very competitive and above board. 

Furthermore, production-sharing contracts in deep water, where the recent big oil finds have been, favour the international oil companies, which are under no greater obligation to sub-contract any work to local companies. 

Although larger oil finds translates into more production, that does not mean companies would start pumping out vast amounts of crude oil. 

It takes a few years to start extracting oil from a well – nobody knows what the price of oil would be then – and the amounts are governed by the national oil depletion policy that restricts production to 3% of oil initially in place. 

News that the government could allow a consortium of companies to undertake the development of marginal fields was a shot in the arm for the listed oil stocks, but is just an idea for now. 

“It is technically challenging to drill for oil. Each well costs US$10mil to drill and they have to make sure they hit the correct spot,'' said an analyst. 

Although some listed oil companies may be fortunate to be included in the consortium, analysts point out that the financial commitment and technical requirements in setting up a new oil exploration and production company may be beyond the balance sheet and skills set of these companies, many of which are just support services providers and listed on the second board. 

The concept of getting a consortium of companies to form another Petroliam Nasional Bhd is like asking independent power producers and cable and transformer manufacturers to form a new national power company. It will be tough. 

They also highlight that should the price of oil drop much more than the current levels, and stay low for some time, prospecting the marginal oil fields may become less lucrative for even smaller companies. 

These concerns may be well spoken about within the investment fraternity but the underlying question most investors ask is whether the oil and gas companies, which have been participating in an industry that is older than most businesses in Malaysia, would start delivering on expectations. 

Oil and gas companies have historically never shown the ability to generate the kind of profits expected of them now, and are trading at price to earnings multiples that are much higher than the market average. 

“It is hard for a person that relies on fundamentals to look at it now. It appears as if the good old days are back,'' said a fund manager. 

Some analysts say the share prices of SCOMI GROUP BHD, Crest Petroleum Bhd and Petra Perdana Bhd may more than double during the rally in the sector but this may not prompt them to change their tune on such companies. 

Malaysian Pacific Industries Bhd, owned by Tan Sri Quek Leng Chan, has been in the business for years and delivered a fantastic profit a few years back. Will its share price ever see RM50 again?'' asked one disbelieving analyst. 

And they say expectations should be a guide and not a definitive benchmark of what these companies will do. They are after all just that, expectations. 


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