Oil and gas sector falls short of expectations as oil prices collapse

Expectations for the oil and gas industry, which had been tipped as a dark horse for 2018,were high for some fund managers at the start of the year, but optimism turned into volatility, and then panic going into the final quarter.

The price of Brent crude had been on a steady upward trend until early October, when it reached its recent high of US$86.29 per barrel. However, it did not take long for the price to collapse and drop below the US$60 per barrel level to US$53.82 on Dec 21, on concerns over a weakening global economy and surging US crude output and falling stock prices.

The decline continued despite the Organisation of the Petroleum Exporting Countries (Opec) and Russia-led allies agreeing to slash production.

It is worth noting that most O&G counters on Bursa Malaysia were in the red, including Sapura Energy Bhd, Bumi Armada Bhd, Velesto Energy Bhd and Barakah Offshore Petroleum Bhd. Dialog Group Bhd and Serba Dinamik Holdings Bhd wer e among the few O&G players that managed to chalk up gains.

YTD (Dec 21) Sapura Energy has fallen 57.8%, Bumi Armada, 79.1%, Velesto Energy, 42.6%,and Barakah Offshore by 84.5%. Dialog and Serba Dinamik recorded total returns of 20.7% and 15.6% respectively.

Maybank Investment Bank Research analyst Liaw Thong Jung writes in a recent strategy report that the Opec+'s (comprising Opec and 14 non-Opec countries) latest pact to cut production by 1.2 million barrels per day from Jan 1 will be closely monitored.

"A strong compliance will shape 2019 positively. A break-up, or poor execution, will reverse all that and a volatile market will ensue. We estimate the oil price to average US$65 per barrel, a level that would instil confidence," Liaw says, adding that Dialog and Yinson Holdings Bhd are his top "buy" calls in the sector. He is also calling a "buy" on Malaysia Marine and Heavy Engineering Holdings Bhd (MHB), Sapura Energy and Velesto Energy.

Affin Hwang's Tan Jianyuan agrees with Liaw that share prices in this space have mostly bottomed out, with a select few staging a recovery.

"Based on consensus estimates, aggregate sector earnings will see a stronger 13% year-on-year growth in 2019 against our coverage universe of 14%, driven by a turnaround or recovery of a few companies like Sapura Energy, MISC Bhd, MHB and Velesto Energy. Risks to earnings lie in movement of the ringgit, oil prices and capital expenditure spending," Tan says, adding that he has a "buy" call on Petronas Chemicals Group Bhd and Serba Dinamik.