Bearish oil weighs on O&G stocks

Counters down and may continue to be under pressure

PETALING JAYA: Upstream oil and gas (O&G)-related stocks fell yesterday and will continue to be under pressure on bearish oil prices.

Petron Malaysia Refining & Marketing Bhd slid 24 sen to RM7.10, while Hengyuan Refining Co Bhd dropped 23 sen to RM4.92 against a slight gain in Bursa Malaysia’s benchmark FBM KLCI, which closed 1.86 points higher at 1,777.43.

Other O&G-related counters that fell included Petronas Dagangan Bhd, the retail arm of Petroliam Nasional Bhd (Petronas), which was down 60 sen to RM24.18, and Sapura Energy Bhd, an oilfield services company which saw its shares closing four sen lower at RM1.57.

However, Petronas Gas Bhd rose 20 sen to RM18.90, while Petronas Chemicals Group Bhd was flat at RM7.15.

Global crude benchmark Brent has fallen nearly 17% as at press time since May 23, while US benchmark West Texas Intermediate has fallen more than 17%.

According to analysts, the lack of coherent action among oil-producing countries and the supply glut in the market have exerted a downward pressure on crude oil prices.

These analysts said the market had turned bearish after four consecutive days of a significant drop in oil prices. Prices now hover below US$45 per barrel for both benchmarks.

Oil prices started to fall two weeks ago, following the unexpected rise in US petroleum stocks although there was a brief rally when diplomatic tensions flared between Qatar and major Middle Eastern oil producers, including Saudi Arabia.

However, MIDF Research analyst Aaron Tan told StarBiz that given the drop of the past few days, crude oil prices could see a slight upward correction, but the O&Grelated stocks would likely face a challenging rest of the year.

“Crude oil prices have dropped so low due to the weak fundamentals, particularly due to supply exceeding demand for crude oil. This is largely due to the shale oil production in the US which contin- ues to remain high, with actions taken by the Organisation of the Petroleum Exporting Countries (Opec) to limit crude oil production unsuccessful in shoring up the oil price.

“The O&G industry has taken a hit due to the low oil price environment, even as the cost of crude oil production goes down.

“With regard to the oil price, 2017 will remain challenging. However, we believe that the average oil price for this year will hover at about US$50 per barrel,” said Tan.

He added that the earnings of O&G-related companies could be affected significantly on the back of the continuing low oil price environment.

“At MIDF Research, we are positive on the outlook of O&G downstream players. On the other hand, as for the upstream players such as the services providers, we are negative on them, going forward,” he noted.

Meanwhile, Kenanga Research analyst Sean Lim said the current bearish market “is a temporary setback”. He said despite the current downtrend pressure in the market, oil prices should be able to trend upwards, moving forward.

Analysts said rising US shale oil production, coupled with the weakening impact of Opec’s production cuts, were the main factors weighing on oil prices.

“Moving forward, companies which own oilfields, such as Sapura Energy Bhd and Hibiscus Petroleum Bhd, will be directly impacted due to the current oil price downtrend.

“O&G service providers, on the other hand, are expected to be indirectly affected,” said Lim, adding that companies backed by secured contracts would be able to register a commendable performance despite the oil price fluctuations.

He added that the domestic O&G industry would not experience any major change in terms of capital expenditure if crude oil prices trend below the threshold of US$45.

Tan and Lim do not see a significant increase in merger and acquisition exercises among the O&G firms despite Petronas’ call in recent years for consolidation in the domestic O&G industry to weather the impact of volatile oil prices.