Extended output cuts no quick boost for O&G stocks

08 July 2019

Source: The Sun

PETALING JAYA: The extended production cuts by the Organization of the Petroleum Exporting Countries (Opec) do not point to an immediate catalyst for oil and gas (O&G) stocks on Bursa Malaysia to rally.

BIMB Securities analyst Azim Faris Ab Rahim sees the extended cuts by Opec as a positive step to continue support the oil price and spur investment in offshore capital expenditure.

He said the trade conflict between the US and China had resulted in the threat of economic slowdown which would hamper oil demand growth. Hence, the supply must be “controlled” accordingly and justifying what Opec is doing.

“As oil price stabilises at US$60-70 a barrel, we do not see any immediate catalyst to O&G stocks. Nonetheless, this could lead to continuation of Petronas’ spending plan which is important for the O&G’s sector recovery over the long run,” he told SunBiz.

On Friday, Bursa Malaysia’s Energy Index lost 0.45% or 4.85 points to close at 1,068.02 points.

Brent crude futures settled at US$64.23 a barrel and West Texas intermediate at US$57.51 a barrel last week.

Earlier in the week, Opec agreed to extend its production cuts by nine months to March 2020, aimed at supporting prices and soaking up excess supplies.

Azim said a key concern is that most O&G companies, particularly offshore support vessel players such as Dayang Enterprise Holdings Bhd, Perdana Petroleum Bhd and Barakah Offshore Petroleum Bhd, would still need to resolve debt legacy issues, and this would distract them from pursuing further growth.

“We still see upside potential to stocks with strong balance sheet and earnings growth potential (Hibiscus Petroleum Bhd and Yinson Holdings Bhd) and sector recovery play (Velesto Energy Bhd and Malaysia Marine & Heavy Engineering Holdings Bhd (MMHE)).”

BIMB is maintaining its 2019 average price forecast for Brent crude oil at US$65- 70 a barrel. It is currently overweight on upstream stocks in its coverage (Hibiscus, Yinson, MMHE, Velesto) and neutral on downstream stocks (Petronas Chemicals Group Bhd, Petronas Dagangan Bhd, Lotte Chemical Titan Holdings Bhd).

Meanwhile, HLIB Research analyst Sean Lim believes oil prices may strengthen slightly in the second half of 2019 on Opec’s production cut agreement, but noted that upside is still capped by resilient US production growth and lingering uncertainty arising from the US China trade war putting pressure to the overall demand growth.

“Therefore, any broad-based sector rerating purely on crude prices are not sustainable. There are still legs for those who can deliver earnings and capable of turnaround. Avoid those which are highly geared and have yet to undergo restructuring,” said Lim.

It continues to favour maintenance players (both upstream and downstream) with strong earnings delivery such as Dialog Group Bhd and Dayang.

Lim said floating production storage and offloading tenders remain robust and Yinson is in good position to win several big contracts backed by its decent track record and good joint venture partner.

“Overall, we expect topline growth for services players as evident by better activities level guided in Petronas activities outlook 2019-2021 published last year. However, margins could be still tight as oil majors are still cost cautious and not willing to expand the rates significantly. Therefore, it really depends on their respective cost management and operating efficiency,” said Lim.

HLIB Research is keeping a neutral stance on the sector as it sees limited upside in oil prices.

“However, we believe that there is gradual improvement in the upstream space for the services players. Not overly bullish on broad-based sector but selectively on counters with selected thesis,” explained Lim.