By MARK RAO / Pic By TMR
Investors could be seeking to further reduce their exposure to local oil and gas (O&G) stocks, as the volatile sector is weighed down by falling crude oil prices and lacklustre corporate earnings.
The stock dumping and share price declines in O&G counters are driven both by sentiment and fundamentals, said JF Apex Securities Bhd senior analyst Lee Cherng Wee.
“Investor sentiment has been influenced by the declining crude oil prices and oversupply in the market,” he told The Malaysian Reserve (TMR) when contacted.
“Fundamentally, companies are (also) still struggling in terms of earnings and ability to secure new contracts.”
Lee added that O&G service providers have fared slightly better than the exploration and production (E&P) players, thanks to outstanding contracts which cushioned future earnings.
MIDF Amanah Investment Bank Bhd research analyst Noor Athila Mohd Razali said investors, however, are unlikely to rush to exit the O&G sector despite the 40% decline in crude oil prices.
“This is due to the fact that, even at the current crude oil price of about US$54 (RM223.56) per barrel, it is still a comfortable level for most companies as it is above the break-even price,” she told TMR.
“We have a ‘Neutral’ call on the upstream and a ‘Positive’ call on the downstream O&G sectors.”
Brent crude oil came off a year high of above US$86 per barrel on Oct 3 last year, to trade between US$52 and US$54 per barrel yesterday, fuelled by the oversupply in the market and the heightened prospect of a global economic slowdown.
Once prime beneficiaries of the higher oil price environment, pure play E&P firms Hibiscus Petroleum Bhd and Reach Energy Bhd have since noted significant declines in their share prices.
Hibiscus retreated to be a penny stock mid-December last year and closed one sen lower at 83 sen yesterday. After reaching a year high of 50 sen on Oct 4 last year, Reach Energy lost some RM294.4 million in market capitalisation to close at 27 sen.
O&G service providers make up a bulk of the local bourse and shares of Sapura Energy Bhd, Bumi Armada Bhd and Alam Maritim Resources Bhd have been on the declining trend over the recent months.
Sapura Energy, which also has a strong presence in the E&P sector, is currently trading at a record low and closed at 28 sen yesterday.
Only a few O&G stocks such as Serba Dinamik Holdings Bhd and Dialog Group Bhd have fared better in the current troubled scene.
National energy firm Petroliam Nasional Bhd (Petronas) announced that it will maintain a prudent approach to the market between 2019 and 2021, but pointed out potential activities in the brownfield segment, namely rigs and supporting services.
Lee said the expected growth of brownfield development will only benefit the O&G sector if it translates into more activities and contracts.
“We see slow improvement in (upstream) activity this year, while investor sentiment is likely to improve by the second half of 2019, contingent on an increase in exploration activities. We have a ‘Neutral’ outlook for the sector this year.”
On price of crude oil, FXTM global head of currency strategy and market research Jameel Ahmad said the risk-off environment fuelled by negative momentum in the stock market is adding pressure to oil prices.
He said a positive change in risk appetite is needed to encourage a sustained oil price rally in 2019.
“This means, we need to improve external headlines and particularly a positive breakthrough in the trade tension between the US and China.
“The prolonged trade tension and its impact to the global economy are the major reasons why investors’ appetite towards risk is very low, which is likewise why a breakthrough to this issue would be seen as a major plus for the price of oil over the long term.”
He also did not rule out concerns over a looming global economic slowdown this year and the possibility of oil prices hitting rock bottom of US$35 per barrel on the West Texas Intermediate index.