PETALING JAYA: The listless market coupled with low oil prices and an aggressive trade policy by the United States have put pressure on oil stocks.
Despite an overall palatable earnings report from the oil and gas sector with most companies meeting expectations, stock prices took a whacking as investors aren’t convinced about their potential moving forward.
It was a mixed bag of results from the recently completed earnings reporting season from the oil and gas stocks. The likes of Malaysia Marine and Heavy Engineering Holdings Bhd, SAPURA ENERGY BHD, Velesto Energy Bhd and DAYANG ENTERPRISE HOLDINGS BHD announced poor earnings.
Bumi Armada kicked off financial year 2019 (FY19) with a 28.5% increase in net profit to RM62.21mil for the first quarter ended March 31 from RM48.42mil achieved a year ago.
Dayang, which has been a darling stock so far this year, surprised the market when it announced a net loss of RM4.13mil for its first quarter to March 31. While this was a huge improvement from the the loss of RM21.30mil a year ago, investors were still expecting the stock to go back into the black.
Velesto posted a net loss of RM22.22mil in its first quarter ended March 31 compared with a net profit of RM5.02mil in the previous corresponding period.
Meanwhile, Petroliam Nasional Bhd recorded a 19% increase in ex-impairment net profit of RM14bil for its first quarter to March 31.
Petronas’ cashpile remained strong at RM172bil. The group had also incurred capital expenditure (capex) of RM8.3bil during the quarter, which is 31% lower than the year before.
The bulk of its capex were for upstream projects.
UOB Kay Hian analyst Kong Ho Meng in his report said that some upstream stocks reported weak results due to slow project progress and monsoon inactivity following a supernormal fourth quarter of 2018 season, which he had forewarned.
Kenanga Investment analyst Steven Chan maintains his “neutral” call on the sector, given limited upside on big-cap Petronas-related counters.
“Although the recently concluded results season is deemed as largely within expectations, it was mostly due to lowered expectations, rather than fundamental improvement in earnings ,” Chan notes that average earnings actually declined 27% year on year.
Nonetheless he expected Petronas’ capex to increase in the coming quarters given its capex commitment of more than RM50bil for 2019, versus capex of RM46.8bil last year).
Kong also maintained his “market weight” call on the sector with a preference for Dialog and YINSON.
He noted Petronas’ domestic capex of RM5bil was lower than the RM8bil in the fourth quarter of 2018 and RM9bil in the first quarter of 2018.
“We believe Petronas remains on track to spend more than RM50bil in total capex, with about RM30bil for upstream projects. Of this, about RM15bil will be for domestic upstream (2018: RM12bil),” he said.
He expected Petronas tol focus on overseas diversification but many oil and gas stocks remain too locally-dependent and hence will not benefit from Petronas’ overseas upstream focus.
“Fundamentally, we still like stocks that are internationally competitive and well-diversified,” said Kong.
His top picks are Dialog, and FPSO asset owner Yinson, both of which have near term event catalysts.
Kong said that regardless of oil price movements, the focus in the second half of this year would be on earnings delivery, especially for maintenance and brownfield works, given that local greenfield project awards will disappoint sentiment.
“We understand activity levels for brownfield works and decommissioning have increased post-monsoon season, and this coincides with the higher rig and offshore support vessels demand under the Petronas Activity Outlook,” he said.
Chan sees key beneficiaries of an increased Petronas capex to include Malaysia Marine And Heavy Engineering Holdings Bhd, Sapura Energy, Velesto, Uzma, MISC and Yinson.
As earnings delivery and balance-sheet resilience still remain Chan’s key stock selection criteria, he favoured Dialog, Serba Dinamik, and Yinson, although he has highlighted Pantech and Sapura Energy as potential turnaround plays.
Meanwhile on the macro front, the situation continues to look uncertain.
Brent for August settlement fell 79 US cents, or 1.3%, to US$61.20 a barrel on London’s ICE Futures Europe exchange. This is some 17% lower than its high of US$73.63 on April 25.
This would mean that oil has wiped out a huge part of its gains made earlier this year. A lot of this can be attributed to the tense global trade environment
While a taut situation in the Middle East has been supporting prices somewhat, the White House indicated over the weekend that it would be willing to negotiate with Iran without preconditions. Another important factor determining oil prices will be whether Russia keeps cooperating with Saudi Arabia on production cuts.
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