Rising inventories may halt oil and gas rally

Brent crude futures dropped 65 cents, or 1%, to settle at $63.18 a barrel, while U.S. West Texas Intermediate (WTI) crude futures fell 89 cents, or 1.6%, to settle at $55.88 a barrel.

PETALING JAYA: Oil and gas stocks have been powering the rally on Bursa Malaysia, following a rise in crude oil prices for two straight months as the Organisation of Petroleum Exporting Countries (Opec) and its partners reduce output in their bid to balance global oil markets.

This has further been helped by the US-China trade war cooling off.

This rally may come to a temporary halt after the American Petroleum Institute said that US crude inventories rose by 7.29 million barrels last week.

This will be confirmed by the Energy Information Administration, which is set to release its report on Wednesday (US time). Should this be the case, this will be the biggest weekly build since the middle of January.

Brent crude has run from the US$50 level as of end Dec 2018 to its recent year high of US$66.91 as of Feb 22.

Oil and gas favourites that have been hogging the volumes list over the last few weeks include Sapura Energy Bhd, Dayang Enterprise Holdings Bhd, Velesto Energy Bhd. Barakah Bhd and Bumi Armada Bhd.

With the macro front being more conducive, coupled with the fact that most of the stocks have beat badly beaten down, various brokerages also turned bullish on the sector.

A big catalyst last week was Dayang, which saw a huge jump in its share price after the company announced that it returned to the black in FY18 as fourth earnings strengthen on higher work orders.

Dayang returned to the black in its financial year ended Dec 31, 2018, after its final quarter of the year raked in a net profit of RM97.72mil compared with a net loss of RM55.21mil in the previous corresponding quarter.

On a year to date basis, Dayang is now up some 155% at its last close of RM1.38.

Last week, Maybank Investment Bank (IB) also said that the oil and gas sector is on course for a cyclical recovery in 2019, with the crude oil price expected to be conducive for stronger investments in the sector.

It said that the O&G companies could likely spend more on capital expenditure (capex) beginning from 2019, in tandem with the cyclical recovery.

Maybank IB’s top-five stock picks in the O&G sector are Dialog Group Bhd, Malaysia Marine and Heavy Engineering Holdings Bhd, Sapura, Velesto and Yinson Holdings Bhd.

Then there are many analysts which have turned “positive” on Sapura based on its financial metrics as well as its continuous efforts to replenish its orderbook.

Credit Suisse’ Danny Chan reinstated coverage on Sapura Energy following the ‘significant & tricky’ rights issue with a new major shareholder - PNB.

He has a target price of 40 sen, implying an upside of some 30%.

“In theory, minorities will get the best of both worlds, the entrepreneurial drive of its president and group CEO Tan Sri Shahril Shamsuddin, (as his family still control 16%) and moderation provided by PNB,’’ Chan added.

Chan expects PNB to tackle executive compensation, which has been a major grouse by investors.

“If crude Brent oil forecast of US$70 per barrel is achieved, then the majors will have sufficient free cash flow to provide opportunities for service providers like Sapura,” he says.

He has forecast Sapura to swing to profitability from FY20 onwards.

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