O&G counters to be volatile amid market, earnings uncertainty

The volatility observed in the counters is a short-term play as oil prices undergo corrections, says analyst


The highly liquid oil and gas (O&G) counters on Bursa Malaysia are vulnerable to volatility as the earnings outlook for many remains mixed, while oil companies continue to have a tight capital expenditure (capex) programme despite higher average energy product prices.

JF Apex Securities Bhd senior analyst Lee Cherng Wee said the recovery in oil prices noted over the fourth quarter (4Q) of last year could see some gain in company earnings, but results will generally be mixed as capex by oil majors have yet to pick up.

“The volatility observed in O&Grelated counters is a short-term play as oil prices undergo corrections. The earnings outlook remains challenging.

“As the quarterly results come in from last year, the markets are not expecting any positive surprises (to indicate a recovery in investors’ sentiment),” he told The Malaysian Reserve (TMR).

He only expects a sustainable improvement in sector earnings when oil majors resume capex, which is not the case at the moment.

The calender 4Q earnings figures have been mixed to date. Offshore and maritime service provider MISC Bhd posted a steep slump in profit for its 4Q ended Dec 31, 2017, due to weaker contributions from the group’s shipping business.

Net profit fell to RM68.2 million from the RM529.8 million a year earlier as higher vessel operating costs and impairment on receivables in the liquefied natural gas division ate into group margins.

Meanwhile, the petroleum business was negatively impacted by fewer earnings days, lower freight rates and higher bunker costs recognised over 2017.

Its downstream shipyard operator Malaysia Marine and Heavy Engineering Holdings Bhd recovered to a net profit position of RM48.13 million in the same period compared to the net loss of RM119.67 million a year ago, mainly supported by the completion of projects in the heavy engineering division.

This was in spite of fall in turnover by 18.3% year-on-year (YoY) to RM247.9 million, owing to lower contributions from the heavy engineering and marine businesses.

Sector favourite Dialog Group Bhd’s net profit jumped by 26.7% YoY to RM115.76 million for its 2Q ended Dec 31, 2017, bolstered by Malaysian operations and increased contributions from joint venture and associate companies.

This was in spite of the technical service provider for the petroleum and petrochemical industries maintaining 2Q revenue at RM857.43 million compared to the RM856.78 million in the corresponding quarter a year ago, as international operations were weighed down by lower sales of specialist products and services for the India, Russia and Australia markets.

Reduced activities in Singapore, Australia and New Zealand also brought down turnover, Dialog noted in an exchange filing.

Sector peers like Bumi Armada Bhd, Sapura Energy Bhd, Hibiscus Petroleum Bhd, Yinson Holdings Bhd and UMW Oil & Gas Corp Bhd (UMW-OG) have seen their share prices ease in tandem with the correction on global markets and energy markets.

Shares of Sapura Energy, Hibiscus Petroleum and UMW-OG have been actively traded daily due to the volatility on global markets.

Small upstream oil company Hibiscus Petroleum, for instance, was the most actively traded counter, rising some 13 sen, or 16.9%, to 90 sen on reports of plans to raise production levels from its existing brownfield asset.

Malaysia’s largest listed sector play, Sapura Energy, has been actively traded for the past few months with a downward share price trajectory, as sustained selling by major institutional shareholder, the Employees Provident Fund, curtails a share price recovery despite analysts having a ‘Hold’ or trading ‘Buy’ call on the stock with a target price of about RM1 and above.

MIDF Amanah Investment Bank Bhd analyst Aaron Tan said the highly liquid nature of these counters is driving the volatility in their shares.

“O&G stocks have been trading at high volumes over the recent period owing to their high number of outstanding shares available to institutional and retail investors,” Tan told TMR when contacted.

“This creates a highly liquid environment and explains why the O&G sector appears to be more affected by the global decline in markets.”

The sell-off noted across global equity markets is on expectations of rising yields in the US on rising inflationary prospects, while the benchmark Brent contract coming off a seven-month rally to fall 11% to US$62.79 (RM246.14) per barrel last Friday.

The threat of the US shale industry was a notable factor bringing down oil markets after the US Energy Information Administration (EIA) reported drillers there were producing 10.25 million barrels of oil daily.

US oil production is further expected to reach 11 million barrels of oil per day come 2019, according to the EIA report. That could be negative for the energy markets and sector stocks.

“We expect more volatility going forward so the recent trends in the oil market are not surprising,” AmInvestment Bank Bhd senior VP of equity research Alex Goh told TMR.

“New project rollouts by oil majors could be deferred pending further clarity to the price direction.”

Tan said oil prices falling below the US$60 per barrel mark cannot be discounted as the industry is already budgeting for prices to average at that level in 2018.

“We are not heading for a crash as oil surplus in the global market stands at 1.5 million barrels, which is a healthy position for the market,” he said.

When oil prices crashed in 2014, the industry was sitting on a surplus of 2.5 million barrels of oil, creating an oversupply situation that was exacerbated by the global financial crisis that hit that year.