Focus on oil and gas producers, not vessel operators

U.S. benchmark West Texas Intermediate (WTI) crude oil prices were up 35 cents, or 0.7 percent, at $54.07 at 0010 GMT, not far from last year's high of $54.51 reached on Dec. 12.

MALAYSIAN companies with oil producing assets are the clear beneficiaries of the recent global oil pact by major producers to cut down oil production.

The initiative, which was spearheaded by the Organisation of the Petroleum Exporting Countries (Opec) and involved both Opec members and non-member countries, will see a reduction of around 1.76 million barrels per day (bpd) from the global output beginning next year.

As part of the pact, on Dec 21 Petroliam Nasional Bhd (Petronas) announced that it is cutting down production by up to 20,000 bpd.

While it is clear that Opec members have two ever-present objectives – to raise oil prices and maintain its market share – the effectiveness of its efforts will be seen as early as over the next few months.

According to a recent report by the International Energy Agency, the global oil market could show a shortfall of 600,000 bpd early next year due to the expected increase in oil demand while total production becomes lower.

Enra Group Bhd president and group CEO Datuk Mazlin Junid believes that oil prices will be capped at the US$60 level for the time being.

“There are so many variables that impact the price of oil for different parts of the world. Conventional oil is made up of offshore and onshore production, and they have vastly different production costs. But then there is unconventional production such as shale oil which does not fall into the production cutback, and the US aims to kickstart production after Donald Trump gets into office. Interesting times ahead,” he explains.

At the same time, the outlook remains bleak for companies in the offshore services industry. Companies in this segment continue to face threats that have plagued industry players over the past two years, namely the underutilisation of vessels as well as rock bottom charter rates.

“Normally it will take about six months of price stability until new exploration and drilling contracts are tendered. Some players can rely on the maintenance contracts, but this will not improve overall utilisation as there is still an oversupply of vessels,” says a CEO of another oil and gas firm.

This means that bullish investors should opt for companies which own or operates oil and gas assets as their revenue base will head higher in line with improved crude prices.

The two companies that offer the cheapest entry prices are Hibiscus Petroleum Bhd and Reach Energy Bhd.

In spite of its past troubles, Hibiscus, which operates the Anasuria Cluster in the North Sea in United Kingdom, produced over 3,400 bpd during its latest quarter ended Sept 30, 2016.

The company reported a pre-tax profit of RM7.48mil on the back of RM54.75mil in revenue for the quarter mainly from the crude sales. In a previous exchange filing, Hibiscus disclosed that the barrels of crude from the cluster were sold at a realised price of US$45.21 per barrel.

Meanwhile, Reach, which had recently received shareholder approval to buy a stake in an onshore field in Kazakhstan, could benefit from the same angle.

The company will purchase a 60% stake in Palaeontol BV, which is the owner of the Emir-Oil LLP field for a sum of US$154.9mil. The field has four producing fields, two development fields and six drillable prospects.

Reach had previously disclosed that the field will have the capability to double its oil production to 12,000 bpd by next year.

At the other end of the scale, the blue-chip SapuraKencana Petroleum Bhd is a promising proxy for those with a positive view on the direction of oil and gas prices.

Among the group’s key assets are several gas fields in offshore Sarawak which will begin production in 2018.

In a note, CIMB Research says SapuraKencana will enjoy a major uplift in profits once the gas fields begin operations.

This is because gas from these two blocks are sweet and relatively inexpensive to develop, while Petronas is a ready buyer for the commodity, it says.

In a recent note, Maybank IB Research says there are good reasons to stay optimistic and stay invested over the next six month.

The firm has upgraded its outlook on the sector to “positive” from “neutral” previously in light of Opec’s long-term output cut.

“With most stocks having de-rated and much of their values lost, in our view now is a opportune time to bottom-fish with much trading opportunities for a sector which has been sidelined for a while,” it says.

The research house has also upgraded its target prices for four stocks with a “buy” call, namely Dialog Group Bhd, SapuraKencana, Wah Seong Bhd and Barakah Offshore Petroleum Bhd.