Upside surprises for oil prices remain low: Research house

PETALING JAYA: Hong Leong Investment Bank (HLIB) Research is maintaining a “neutral” stance on the oil and gas (O&G) sector, citing it believes that the upside surprises for oil prices still remain low this year, with more negative news expected to surface.

In a note yesterday, the research house said it maintained its US$50-US$60 (RM213-RM255) per barrel (bbl) range for Brent oil prices in 2017.

Its analyst Lim Sin Kiat added the oil market is still driven by news rather than fundamentals, adding the anticipated non-extension of oil production cut and further escalation of Qatar situation are expected to give impact on the sector.

“We believe the Qatar news to issue just a short term blip given that Qatar is the existing main ally of US. Moreover, the oil production of the country is immaterial at 656,000 bbls per day (based in 2015 data),” he said.

Lim noted that Brent oil prices have been up year-on-year, averaging at around US$53.6 per bbl in Q1’17 compared with US$33.7 per bbl in Q1’16.

Nevertheless, he said oil prices have again showed weakness recently in May 2017 with Brent oil prices dropping below US$50 per bbl due to recent news of Qatar being isolated by Middle Eastern countries on the allegation by US president Donald Trump they were funding terrorism.

In addition, Lim said the isolation would cause Opec production cut to be ineffective given Qatar would ramp up its own oil production.

Meanwhile, he noted that the recent Q1 results of the eight out of nine companies under its coverage came within expectations, which is a great improvement compared with underperformance of results seen in previous quarters.

Lim said the Q1 concluded results is typically the weakest seasonally low activities for O&G companies, especially for upstream services. The muted showing of results in Q1’17 had not affected shares prices of the companies under coverage significantly.

“We believe this was due to market pushing forward its expectations on the coming quarters in 2017, of which activities are expected to pick up in view on more stable oil prices,” he said.

Lim expects the maintenance, construction and modification (MCM) and Pan Malaysia contracts’ awards to be coming by Q3’17, which is positive news to the overall industry amidst uncertain oil prices. Potential beneficiaries include Dayang Enterprise Holdings Bhd, Petra Energy Bhd and Sapura Energy Bhd.

HLIB Research’s top pick for the sector is Dayang Enterprise Holdings Bhd (Buy; RM1.42) – owing to it being biggest potential beneficiary of MCM and Pan Malaysia contract award.