Investors prioritising ESG principles

Lau: Global crude oil price is estimated to be around US$80 (RM336mil) to US$90 (RM378mil) a barrel this year.

OIL prices may be on the rise but so far that has had little impact on local oil and gas (O&G) counters. Bursa Malaysia’s Energy Index has declined 8% or 64 points to 735.59 points over the last one year.

During that period, crude oil prices have surged by 63% to US$90 (RM377.10) a barrel.

It is worth noting that the Bursa Malaysia Energy Index is dragged down by debt-laden Sapura Energy Bhd and controversial Serba Dinamik Holding Bhd.

Globally too, O&G stocks are not exactly on fire.

One reason is that the whole sector is no longer favoured by many institutional funds which have embraced environmental, social and governance (ESG) principles in their investment philosophy.

Areca Capital Sdn Bhd CEO Danny Wong says that the current investing landscape is changing as investors put heavy emphasis on ESG.

“We think the old valuation may not be applicable, that’s why we are seeing the share price of local oil and gas stocks still underperforming despite strength in oil prices,” he tells StarBizWeek.

He says that at Areca, the fund prefers energy companies that are reducing their ESG risks, such as taking a proactive approach in the energy transition and renewable energy space.

Another reason is that while the price of oil is up, investors need to be convinced that prices will remain so and that this will actually translate into higher earnings of listed companies operating in the space.

Rakuten Trade head of equity sales Vincent Lau says that investors are still waiting for consistent earnings by locally listed O&G players, many of whom are still struggling to recover from the 2014 oil price rout, coupled with the effects of the Covid-19 pandemic.

“Many investors are concerned about the volatility of crude oil prices,” says Lau.

Another concern is the capital expenditure of Petroliam Nasional Bhd (Petronas).

“Many local O&G companies are service related, which rely on Petronas capital expenditure (capex). However the capex has not been expanding for many years,” Lau says.

Petronas is not alone. Global oil majors such as Royal Dutch Shell and Exxon Mobil have also reduced their capex for high-carbon projects.

In addition, the crash in the oil market in 2020 was so brutal that saw global O&G companies cut capex by US$85bil (RM357bil) that year alone, marking a 13-year low of capex spend.

It is this underinvestment, coupled with rising demand, that is driving up crude oil prices.

Rakuten’s Lau estimates global crude oil prices to be around US$80 (RM336mil) to US$90 (RM378mil) a barrel this year.

There are some clear listed beneficiaries.

Lau names two, namely Hibiscus Petroleum Bhd and Dagang Nexchange Bhd (DNeX), which are both involved in exploration and production activities.

In the last 12 months, Hibiscus’ share price has risen by 80% while DNeX has jumped more than three-fold, although this group has other activities going for it, such as its acquisition of Silterra Malaysia Sdn Bhd, the semiconductor wafer foundry.

Both Hibiscus and DNeX seem to have benefited from acquiring producing assets when oil prices were low.

Now it appears more acquisitions are taking place where smaller energy firms are buying O&G assets that are being sold by oil majors who continue to face pressure to move away from fossil fuels and focus instead on renewable energy.

The Financial Times reports that some hedge funds which have been scooping up the shares of “unloved” O&G companies are now reaping big gains as energy prices surge.

Noreco, a Norwegian based O&G company, backed by hedge funds and which is buying the Danish upstream assets from Shell, has seen its stock price gain some 10% this year.

Areca’s Danny expects that the trend of small energy companies buying fossil assets to continue if oil majors continue to face pressure to divest their assets.

“However, small energy companies should examine their ability to stomach the assets financing.

“For example, we have seen many small oil and gas companies file for bankruptcy in 2020 due to depressed crude oil prices impacted by the pandemic,” he tells StarBizWeek.

Locally listed service providers, though, seem to be left out of the buzz.

Uzma Bhd’s stock is down 11% over the last one year, Dayang Enterprise Holdings Berhad by 17.3%, while Icon Offshore Bhd has shed 4.5%.

As Rakuten’s Lau points out, some of these service providers have entered into contracts for the medium to long term, at prices when oil was lower previously.

But not all is lost. Datuk Seri Hadian Hashim, the managing director of Icon Offshore Bhd, says his company is fortunate to be able to ride out the oil price rise, acquiring a crucial drilling asset when the price of crude was low, and chartering it out now, when prices are high.

He explains: “The diversification efforts that the group had embarked on last year has boosted its overall performance.”

Icon Offshore has long been known as one of the largest pure-play offshore service vessel (OSV) providers.

Today, Icon Offshore’s revenue contribution from OSV Malaysia constitutes about 40%, followed by OSV Brunei at 30%, while its drilling segment contributes the remaining 30%,

Hadian says Icon Offshore is in a good position now to embark on a new growth trajectory at a time when crude oil prices are expected to remain high.

He expects rates for oil field services to improve next year due to the shortage of equipment after years of austerity in the O&G sector.

“There is no new build of assets and service providers that are likely to maintain their spending discipline,” he adds.

Meanwhile, Maybank IB Research singles out Velesto Energy Bhd, Icon, Malaysia Marine Heavy Engineering Bhd (MMHE), Wah Seong Corp Bhd and Dialog Group Bhd as key beneficiaries of Petronas’ domestic activities over the next three years.

This is based on the latest Petronas Activity Outlook 2022-2024 (PAO 2022-24).

“Icon and Velesto remain the best proxies to Petronas’ drilling programs, while MMHE, Wah Seong and Dialog are key beneficiaries of the fabrication, pipe-coating and maintenance works,” the research house points out.

Maybank IB Research also does not rule out a higher capex by Petronas in the second half of this year should oil prices continue to be strong.

“That said, capital remains key, for the higher oil price has led to higher costs and greater volatility, a setback and a concern to a sustainable recovery in the market,” it adds.

Areca’s Danny says Petronas is taking a conservative approach and sees crude oil price at US$50 to US$60 (RM209.50 to RM251.40) per barrel between 2022 to 2024.

“As long as Brent oil price remains above US$60 to US$65 (RM209.50 to RM272.35) per barrel mark, the activity level should remain encouraging.

“Crude oil prices could move higher based on the current situation and underinvestment in the past one to two years.

“However, prices are notoriously volatile, being as much driven by supply and demand issues, as well as speculative and derivative activities,” he adds.

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