O&G stocks at attractive level

PETALING JAYA: Valuations of oil and gas stocks, whose shares suffered severe losses this year amid weak sentiment, post-election shock and further negative newsflow from the US, have become attractive at their current prices.

Foreign funds were heavy sellers as they took profit to redeem losses in other markets.

Fundamental wise, however, the sector is expected to remain buoyant on the back of firm crude oil prices and steady demand. Therefore, the current weakness in prices could provide much bargain-hunting opportunities.

Most of the stocks are trading at a huge discount to their 52-week high.

An analyst at OSK Investment Bank said the current valuations for the oil and gas stocks appeared “very attractive.”

“As soon as investors regain confidence with the Malaysian equity market, oil and gas would be the preferred sector,” he said.

TA Securities, in a report, noted that companies like KNM Group Bhd had a solid business model that would be strengthened further by the recent German acquisition, which increased order book to RM3.9bil.

Even the proposed rights issue was unlikely to dilute earnings, as it would fund the earning accretive acquisition.

“For investors with long-term perspective, vessel owners like Petra Perdana Bhd and its brownfield subsidiary Petra Energy Bhd, Tanjong Offshore Bhd and Perisai Petroleum Bhd are also good picks,” TA said.

A bank-backed brokerage in a recent report said it had reduced the sector's targeted price-to-earnings (PER) to 17 times from 20 times previously to account for the general weak sentiment.

Still, the PER of 17 times based on calendar 2008 earnings was still a premium considering that the high oil prices would ensure strong visibility of contracts.

Its top picks were Dialog Group Bhd and KNM for their strong earnings and management track record.

It deemed also Petra Perdana as a high growth play given the strong earnings visibility from the delivery of new vessels and firm charter rates.

For those who are more averse to risk, the brokerage recommended Eastern Pacific Industrial Corp Bhd and Petronas Gas Bhd as defensive stocks given the recurring nature of their income, as they are concession-based.

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