KUALA LUMPUR: The recent fall in crude oil price that has sparked fears in the oil and gas (O&G) sector and caused a major selldown in most O&G counters here since early this month, begs the question: Is now a good time to buy O&G stocks?
CIMB Research advised its clients “with a long-term investment horizon to take advantage of the recent share price correction to accumulate” in a note on Tuesday.
It said O&G companies are sticking to their growth plans and eyeing opportunities for mergers and acquisitions as the sluggish market has “thrown up attractive valuations”.
Alam Maritim Resources Bhd, which provides marine services to the offshore O&G industry, concurred.
“We have not seen valuations at this level over the past two to three years,” chief financial officer Soffan Affendi Aminudin told The Edge Financial Daily.
He said the recent selldown was “a temporary correction as most O&G companies are fundamentally intact” and there remains strong earnings visibility in most O&G service providers.
AmResearch, however, downgraded its sector view from “overweight” to “neutral” in a report last week, and attributed its move to — among others — the slow rollout of new O&G orders for Malaysian players, which were at RM711 million in the third quarter of 2014 (3Q14) from RM8 billion in the previous quarter.
But Soffan said slower project roll-outs in the award of new tenders in 3Q14 are not a concern as the 3Q14 figures are “fair”, compared to the previous all-time high of RM17.5 billion in O&G contracts awarded by Petroliam Nasional Bhd (Petronas) in 2Q13.
“[The industry] has been seeing many downstream jobs in 2014, plus a few upstream contracts from early 2012, which have not been called out by Petronas yet. These jobs have yet to be done and are only due to expire in 2016,” he said, referring to a backlog of contracts awarded in 2012 and 2013 that are due to be rolled out in the next three years.
UMW Oil and Gas Bhd (UMW-OG) chief executive Rohaizad Darus echoed Soffan’s view that now is a good time to buy, and that he is “not overly worried” about the recent selldown in O&G shares.
“My rigs are still getting jobs at good rates and we are booking good profit so I don’t believe I need to overly worry about the share price slump. And since we have gone down so much, people may want to take the opportunity to buy,” he said, noting that analysts have also remained largely positive on UMW-OG, with CIMB Research giving it a target price of RM5.11. The counter closed on Tuesday at RM3.48, with a market capitalisation of RM7.52 billion.
Malaysia Marine and Heavy Engineering Holdings Bhd (MHB), in an email reply, said the sharp decline in O&G stocks was more reflective of investor sentiment towards the sector than “any company specific issue” and that “as long as the global population requires energy, there will be demand for the O&G industry’s value chain of services that MHB can provide”.
An analyst, who covers the O&G sector, concurred that the recent O&G selldown was largely due to the perception of falling crude oil prices.
As at Tuesday, Brent crude oil spot price was at US$85.74 (RM279.51) per barrel, down 25.48% from US$115.06 in mid-June.
“If you were to look at the dynamics of O&G players in Malaysia, they are all service providers which do not directly derive their revenue from the sale of oil,” said the analyst, contrasting this with large O&G exploration companies like Royal Dutch Shell plc and BP plc.
“Oil companies will still be incentivised to produce oil and hence the need for the services of O&G service providers — as long as the former’s cost or breakeven price is not breached,” he said.
This article first appeared in The Edge Financial Daily, on October 23, 2014.