O&G set for banner year on M’sian stock market

The relatively sustainable oil price floor and higher capital activity have renewed investor sentiment


OIL and gas (O&G) stocks are set for their strongest finish in close to five years, as higher activity and contract awards from oil majors drive fresh investor interest in the sector.

For the year-to-date (YTD), Bursa Malaysia Bhd’s energy index has outperformed the benchmark FTSE Bursa Malaysia KLCI (FBM KLCI).

The energy index, which tracks the performance of 27 O&G and energy-related counters on the Malaysian stock market, is up 41.75% against the FBM KLCI’s 7.3% decline.

This is as the relatively sustainable oil price floor and higher capital activity have renewed investor sentiment and lifted the once-battered market out of the doldrums.

Maybank Investment Bank Bhd research analyst Liaw Thong Jung said the strong showing from O&G stocks is due to a combination of factors including capital expenditure (capex) from Petroliam Nasional Bhd (Petronas).

“We have seen a lot of jobs coming up (for tender and awards) from projects that secured final investment decisions. This has been driving higher work activity in the industry,” he told The Malaysian Reserve (TMR).

“Meanwhile, a lot of the resurgence is being driven by Petronas, as the national O&G company has indicated its capex will come in at RM50 billion this year.”

Recall that Petronas’ capex came in at only RM15.7 billion in the first half of 2019 (1H19) — well below the RM50 billion planned for the full year.

This was largely owing to deferments, rephrasing of projects and pending merger and acquisition deals experienced during the half-year period.

But management for the national O&G company said overall capex for 2019 will reach the planned levels committed earlier — a boon to local O&G service and equipment companies, which are largely upstream service providers dependent on Petronas for work.

Petronas has indicated that it expects growth in brownfield activities, particularly for rigs and its supporting services, and in maintenance works from 2019-2021.

It also highlighted tail-end opportunities in decommissioning and well abandonment works over the three-year period.

Liaw said the drilling and floating, production, storage and offloading (FPSO) segments have been among the beneficiaries during the market upturn, but noted that higher activity is being observed across the O&G value chain.

JF Apex Securities Bhd senior analyst Lee Cherng Wee said the “worst is over” for the O&G industry, with companies that survived the downturn now are better positioned to capitalise on the industry recovery.

“Basically, the pie has been shrinking, with companies that managed to secure longterm contracts faring better, while several companies have managed to raise funds and pared down their debt,” he told TMR, adding it is basically survival of the fittest during the downturn.

The 2014-2015 oil rout forced oil majors to cut back billions of dollars in capex, abort major projects and carry out massive layouts to cope with the unexpected plunge in global crude oil prices.

This meant less work for O&G service providers, many of whom raised debt to capitalise on peak oil prices. Many of these companies then became casualties of the O&G rout after failing to secure sufficient work to service their debt.

Now, fast-forward close to five years later, and the “fittest” oil firms are now among the best-performing stocks in the market today.

Dayang Enterprise Holdings Bhd, Petra Energy Bhd, Carimin Petroleum Bhd and Velesto Energy Bhd are some of the top performers in O&G this year.

YTD, shares in these companies are up 294.4%, 265.8%, 221.9% and 83.3% respectively.

But it is not sentiment alone that has been driving the rally, with all four companies boasting improved showings in their recent quarters.

Dayang Enterprise noted higher earnings in its recent quarter as well as in 1H19, while Petra Energy was in the black over the same half-year period.

Velesto Energy, similarly, returned to profitability in its recent quarter though it’s still at a net loss position for 1H19.

Meanwhile, Carimin Petroleum ended its fiscal year ended Jun 30, 2019, with a net profit of RM28.82 million against a total net loss of RM25.39 million in the corresponding 2018 period.

Another O&G stock making notable gains in the market is Malaysia Marine and Heavy Engineering Holdings Bhd, whose share price is up 67.3% YTD.

The marine and heavy engineering solutions provider, servicing both the offshore and onshore industries, managed to narrow its losses in its recent quarter and for 1H19.

Other companies to look at are Sapura Energy Bhd, which raised close to RM8 billion in funds via a stake sale and rights issue, and Bumi Armada Bhd.

Shares in the latter, which recently secured US$75 million (RM314.25 million) in financing from its major shareholder and completed a US$660 million refinancing exercise, are up 162.5% YTD.

Companies with a diversified revenue base, be it via a presence overseas or across the O&G value chain, have also fared well in the market.

This includes Serba Dinamik Holdings Bhd (up 12.4% YTD) and Dialog Group Bhd (up 9.6% YTD).