O&G stocks rerating tied to earnings prospects


LOCAL oil and gas (O&G) stocks are still dragging despite the rise in the global oil price, but the dislocation between the price of crude oil and O&G stocks is expected to narrow in the coming quarters.

MIDF Amanah Investment Bank Bhd (MIDF Research) head of research Imran Yassin Md Yusof told The Malaysian Reserve that the share price performance of sector stocks is closely tied to expected earnings performance of companies.

Historically, MIDF Research observed the share price performance of O&G counters correlated closely with the performance of the oil price, however, it has seen a dislocation this year.

Imran Yassin said there are many factors weighing down Malaysian O&G stocks despite the higher average crude oil price this year.

Global issues such as the resurgence of Covid-19 cases and domestic issues such as uncertainties caused by political situations are just some of the factors keeping inventors away from the sector stocks.

“There is also the environmental, social and governance (ESG) element as well with more investors reducing exposure in sectors such as O&G.

However, we believe there is still value and attractive valuations in O&G stocks given the high oil prices.

“We believe the so-called ESG discount in this sector may be over compensated and there are still good O&G companies with good ESG ratings. Therefore, we believe there may be a case for the dislocation between the oil prices and O&G stock prices to narrow in the coming quarters,” he said.

This includes for the O&G service providers as well, especially when there is a possibility for oil majors to increase capital expenditure on the prospects of sustained higher energy prices as demand recovers and supply remains tight.

Crude oil prices have tumbled from recent highs as OPEC+ came to a deal to raise production by 400,000 barrels a day in a recent meeting, but analysts believe market fundamentals favour higher prices as demand could outpace the supply rise.

Hence, the Brent contract move below the US$70 (RM295) a barrel level this week could be short-term in nature as the International Energy Agency said the agreement “may go a long way toward filling the substantial supply gap we had expected during the second half of this year”.

The Brent oil futures contract for September delivery was last trading at US$68.87 a barrel, up 31 cents. The contract hit a high of US$77.83 on July 6 before easing on rising Covid-19 infection numbers and expectations of higher supply from OPEC+.

StashAway Malaysia country manager Wong Wai Ken opined a few other factors around why the O&G counters have not risen in tandem with the price of crude, namely investors’ hesitancy.

“Firstly, as crude prices escalated quickly on the back of OPEC’s lack of cooperation, investors are unsure if those prices are sustainable.

“Secondly, investors have not been bullish on Malaysian equities. This year, the index is down 6%, with this past month posting -4%. The weakening ringgit is also proving this point, with the ringgit being the weakest it’s been in a year,” he said.

Wong said oil counters not matching the rise in crude is part of this lack of bullishness in Malaysian equities.

He added the same can be seen in the palm oil sector as crude palm oil prices have improved, but the counters have not followed suit.