Oil and gas shares back on investors’ radar

MSCI's all country world stock index, which tracks more than 2,400 stocks in 47 countries, hit its latest peak as Europe's insurers rose more than 2 percent <.SXIP> on hopes Irma's damage would not prove as costly as feared. The all-country index is up 14.6 percent year-to-date and the S&P 500 has gained 11.2 percent so far this year. Major indices on Wall Street jumped more than 1 percent. All 11 major S&P sectors rose, led by gains in technology and financial stocks. (Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., on Monday, Sept. 11, 2017. )

Stabilising oil price draws investors back to

After more than three years stuck in the doldrums, the oil and gas (O&G) industry seems to be back on investors’ radar.

This week, several O&G service providers made into the top volume list, as the price of oil heads for its third weekly gain.

Brent crude oil touched US$56.40 a barrel, the highest in six months, ahead of Opec (Organization of the Petroleum Exporting Countries) meeting today.

Counters such as Petra Energy Bhd, Sapura Energy Bhd, Carimin Petroleum Bhd, Deleum Bhd and Dayang Enterprise Holdings Bhd have been on the uptrend since September on the anticipation of more projects for the industry.

Interestingly, financially troubled O&G companies such as Alam Maritim Resources Bhd and Perisai Petroleum Technologi Bhd are also seeing traction in their share price movement.

Both companies are currently in the midst of restructuring their debts.

Shares in Alam Maritim rose 31% to 21 sen since the beginning of the year, while Perisai is up 37% to 5.5 sen this week.

“All the negativity in the sector has been priced in and we believe that the sector has reached its bottom,” says a broker.

Although it is no where close to its heydays, the price of Brent crude oil has been more stable and is trading in a band of between US$50 to US$55 a barrel in months.

Also, there is talk in the market that there are potential maintenance contracts worth RM6bil that will be dished out by Petroliam Nasional Bhd (Petronas).

According to sources, the maintenance, construction, and modification (MCM) contracts by the national oil company have been long overdue. “There has been pre-award meeting by Petronas with five to six shortlisted candidates for MCM jobs throughout Malaysia including in Sabah and Sarawak,” a source says. These contracts are typically meant for Petronas rigs that extract oil and gas.

While there are still plenty of uncertainties in the market, the stabilised price of crude oil has provided some fresh optimism for the sector.

“The environment in the O&G industry is seeing some support in the sense that crude oil prices have stabilised,” says Enra president and group chief executive officer Datuk Mazlin Junid.

He says that crude oil prices have been hovering between in this range for the last seven months, compared with a more volatile band some two years ago.

He adds that some oil majors globally were starting to “recalibrate” their capital expenditure to the current cost.

“With lower capex and a lull in exploration over the last few years, there are some indications that more exploration needs to be done soon,” Mazlin says.

Meanwhile, Maybank IB Research reckons that the O&G sector has bottomed out and is on a cyclical recovery.

“An accelerated rebalancing of the global crude oil market will spur capex growth.

“Since global capex has been relatively flat, a pick-up in spending would be an encouragement,’’ the research house says in a report. It adds that the Petronas’ RM60bil capex commitment for 2017 is positive and the sector is slowly seeing a revival in upstream activities, such as drilling work.

International Energy Agency (IEA) has just upgraded its outlook on demand for oil for 2017 to 1.6 million barrels per day.

The Paris-based energy agency said the demand would be led by Europe and the US.

Contrarian views

Nonetheless, the stabilising of crude oil prices and higher demand for oil may not necessarily translate into higher capex from oil majors.

“There are still not enough signs of investment beginning to return, and that raises the risk of tightening of the market in the next five years and a risk to the stability of oil prices,” Neil Atkinson, head of the IEA’s oil markets and industry division, said recently at a conference in Bahrain.

The plunge in crude oil price since September 2014, due to a global oversupply, dropping from US$100 a barrel to below US$40, has led to a significant cut of upstream investment by oil majors.

Some local equity analysts remain bearish on the overall outlook of the sector and they are more upbeat about the prospects of downstream companies.

They say that the crude oil prices are still trading way below from its day of US$100 a barrel, which would curb big exploration projects from coming in.

Also, the carnage from the free fall of crude oil price has prompted oil majors to shift their investments into the downstream sector. The downstream sector of the O&G industry involves the refining of crude oil and natural gas, as well as marketing and distribution of products from crude oil and natural gas. MIDF Research which said that sustained global crude oil prices will not necessarily translate into higher capex spend.

“This notion of strong and stable crude oil prices not translating into higher value offshore projects is corroborated by the expected capex plan by oil majors,” it says.

It adds that the total capex by global oil majors in the exploration and production sector in 2018 is expected to decline year-on-year by 2.2%. MIDF says it is maintaining its “negative stance” on upstream O&G but reiterated its “positive stance on the downstream sector on the back of Petronas’ capex focus.

“We opine that the downstream utility and retail fuel segment will continue to register commendable year-on-year earnings growth, offer above risk-free rate dividend yields and acceptable capital upside,” it said in a report last week.

Prior to the crude oil rout, the downstream sector had not always been the favoured sector among O&G players who went looking for the black gold.

But the industry has changed and the downstream sector has become more attractive among oil majors which want to reduce the effect of low crude price on their balance sheet.

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