Limited downside risks for oil & gas stocks: Analysts

PETALING JAYA: Analysts foresee a limited downside bias for oil and gas stocks, whose share prices have seen a strong rally lately following the rise in crude oil prices.

The deal to cut crude oil production by Organisation of Petroleum Exporting Countries (Opec) and non-Opec members which took effect on Jan 1 has boosted market sentiment with the easing of concerns over the supply glut in the oil market.

Oil prices ended slightly higher last week. Brent crude gained 21 cents, or 0.37%, to US$57.10 a barrel, and US crude was up 23 cents, or 0.43%, at US$53.99.

Malaysia’s state-owned oil major Petroliam Nasional Bhd has made a voluntary adjustment to its crude oil production by up to 20,000 barrels per day.

Last week, Malaysia Marine and Heavy Engineering Holdings Bhd (MHB) saw the biggest rally among oil and gas stocks, rising 12.6%, followed by Dayang Enterprise Holdings Bhd (+11.2%), Petra Energy Bhd (+9.5%), SapuraKencana Petroleum Bhd (+8%) and Alam Maritime Resources Bhd (+7.5%).

However, the share price of Perisai Petroleum Teknologi Bhd, which defaulted on S$125 million (RM377.27 million) debt notes last year, fell 5.9% last week.

Hong Leong Investment Bank (HLIB) Research analyst Lim Sin Kiat believes the improved market sentiment will help stabilise local oil and gas stocks despite an expected bad financial performance for the fourth quarter of 2016 due to the lag effect.

“The recent rebound is quite strong, maybe it can go a little bit further, but we think it won’t be that much. Some players are still struggling with their earnings and even forecasting losses, so it is still not superb,” he told SunBiz.

While some quarters argue that the worst is yet to come for companies struggling with high gearing, Lim is seeing a better outlook for the industry in anticipation of higher average price of US$55 to US$60 (RM245 to RM267) per barrel for 2017 compared with US$47 for 2016.

Analysts opined that the sustainability of oil prices is dependent several factors and the most important one is the compliance with output cuts by oil producing countries.

“It’s in no one’s interest not to comply, but historic figures show that delivering on previous production cuts has been poor,” noted FXTM chief market strategist Hussein Sayed.

In addition, the oil market is facing the risk of shale oil making a comeback, whereby shale oil producers will be able to cover their costs if crude prices exceed US$60 per barrel.

Nonetheless, given the stabilisation of crude oil prices, Kenanga Research analyst Sean Lim Ooi Leong believes it will entice oil majors to increase their activities, with prioritisation on opex-related jobs in shallow waters to reap low-hanging fruits.

Domestically, he anticipates better contract flows from the oil majors in the first half of 2017, including the maintenance, construction and modification and Pan Malaysia transport and installation contract. Potential beneficiaries are SKPetro, Dayang, Barakah Offshore Petroleum Bhd and Petra Energy Bhd.

Sean Lim believes oil prices could have bottomed in 2016, but the sector earnings disappointment risk remains apparent in the first half of 2017 as higher news flow might not translate into immediate substantial earnings recovery. His top pick for the sector is SKPetro, which is a good proxy to ride on the gradual recovery of the sector.

Sean Lim, who is keeping a neutral view with positive bias on the oil and gas industry, is cautiously optimistic given that any execution glitch in the production rationalisation will lead to a correction in prices. His forecast for 2017 average Brent crude price has been raised to US$55 from US$51 per barrel.

A crude price recovery, he said, will directly benefit pure-play exploration and production companies such as Hibiscus Petroleum Bhd and integrated companies with oil production profile, like SKPetro.