O&G thematic dependent to crude oil price

Demand continues to increase while a further escalation in the tension on the Russia-Ukraine border could pump up crude oil price further 


CRUDE oil prices at above US$90 (RM376.20) a barrel again after seven years has attracted investor interest in battered down oil and gas (O&G) stocks in past weeks but analysts warn the interest could deflate if crude falls below the US90 level again. 

Thus, the share price recovery in O&G stocks could be facing a crucial trading week after a “weak” close yesterday. 

Early gains for upstream players like Hibiscus Petroleum Bhd and support service providers like Dayang Enterprise Bhd gave way to profit taking in intraday trade yesterday, leading one chartist with a local brokerage to say the sector stocks are not as “bullish” anymore with investors uncertain of the next move. 

“Stocks like Hibiscus saw profit taking judging from the ‘shooting star’ chart formation yesterday and heavy trading volumes. We have to see how the sector stocks perform over the week’s remaining trading days to know with certainty the sentiment and trend,” he told The Malaysian Reserve (TMR). 

Environmental, social and governance concerns and weak financials over the past few years have meant the sector stocks have fallen out of favour with some institutional investors as well. 

An analyst at a bank-backed brokerage said the overall sentiment in O&G stocks has improved on expectations global energy fundamentals would remain tight as demand continues to increase while a further escalation in the tension on the Russia-Ukraine border could pump up crude oil price further. 

He has forecast Brent crude and West Texas Intermediate oil to average at US$90 and US$86 per barrel respectively in 2022. 

“We believe crude oil prices could reach US$120 per barrel if the political tensions between Russia and Ukraine intensify. Upstream exploration and production (E&P) players will directly benefit from higher oil prices while other upstream services players ought to benefit from recovery in activities as oil companies are more inclined to ramp up their spending amidst a high oil price environment,” he told TMR under the condition of anonymity. 

Shares of Hibiscus are up some 50% to RM1.08 since late November, while Dayang is up 23% since early December as the crude oil price rally grew in strength. 

The analyst said local O&G players with better earnings, proven track record, and recurring contracts should stand to benefit the most from the rising prices. 

He likes Hibiscus as the upstream company recently purchased brownfield assets in Malaysia and Vietnam from Spanish energy and petrochemicals concern, Repsol SA. 

“Other counters that are expected to benefit from the higher oil prices include upstream maintenance players such as Dayang and Carimin Petroleum Bhd. 

“Generally, when oil prices are up, these counters will react positively too as they have high correlation to oil prices,” he noted. 

Rakuten Trade Research VP Thong Pak Leng believes interest in O&G counters on Bursa Malaysia will be a short-term thematic. 

“I think as long as crude oil price stays above US$90, the buying interest will remain,” he told TMR adding the higher crude will certainly put extra inflationary pressure in the US economy. 

AmInvestment Bank Bhd (AmInvest) sees demand in the rig market in South-East Asia returning to pre-pandemic levels this year. 

Goh said the Westwood Global Energy Group’s Global Offshore Rig Market Report indicated offshore investment bounced back in 2021 and recovered to pre-pandemic levels, which augurs well for the offshore drilling industry. 

“Engineering, procurement and construction (EPC) spending surged 200% YoY to US$41.7 billion in 2021, with the last quarter recording US$8 billion. 

“The energy consultant projected that 2022 could accelerate further by 68% year-on-year (YoY) to US$70 billion, the highest since 2013, with annual EPC spend from 2022 to 2025 averaging at US$57 billion annually,” he said referring to the Westwood report. 

In Malaysia, he noted the sector’s contract awards in the last quarter of 2021 to Malaysian O&G operators rebounded 3.5 times YoY to RM5.3 billion, largely from a lumpy Pemex onshore contract award to a Coastal Contracts Bhd led joint venture. 

He added that major fabricators are still suffering from low margins and balance sheet constraints and did not secure significant EPC jobs. 

AmInvest has maintained its 2022-2023 crude oil price projections at US$70-US$75 per barrel for now despite the Brent crude contract rising above the US$90 per barrel level on receding worries the Omicron variant pandemic could significantly dampen global demand. 

“Notwithstanding high global vaccination rates, we are cautious on the emergence of new vaccine-resistant viral variants, the possibility of Iranian crude re-entering global markets, a rebound in US shale production and further relaxation of OPEC production quotas,” he noted. 

Goh has kept an ‘Overweight’ call on the O&G sector as improved crude oil prices and rising global demand will catalyse faster order flows across the value chain. 

“We continue to like Hibiscus’ direct upstream exposure to higher crude oil prices and Dialog Group Bhd’s expanding, yet resilient non-cyclical tank terminal and maintenance-based earnings base,” he added.