OIL AND GAS SECTOR

Investment Bank (HLIB) GLOBALLY, crude oil prices have been hovering below the US$50 per barrel level for nearly three months due to increased production levels from Organisation of the Petroleum Exporting Countries (Opec) countries, volatile US inventory movements and the continuous supply threat from continental US shale oil producers.

Almost the entire Bursa-listed heavy offshore asset owners are currently trading at a discount below its book value compared to a premium before the crude oil price slump mid-2014.

This is largely due to receding profit margins, declining profitability, low offshore activity levels, low charter rates and overall slump in exploration and production activities.

Locally, offshore activity levels have been less-than-exciting as production sharing partners are still on a continuous effort to drive costs down due to depressed global crude oil prices.

This further stresses Malaysia’s pledge to reduce crude oil production by 20,000 barrels a day.

Downstream and utilities related oil and gas stocks have been trading at multiple times its book value, further supported by its stable and robust earnings base.

Large offshore asset utilisation rates and charter rates are still expected to remain depressed throughout 2017, if not lower. Currently, the global utilisation rate (UR) for global rigs is at 68% compared with 73% a year earlier.

The situation is slightly bleaker in SouthEast Asia, where the average UR for large offshore assets is at only 65.7%.

MIDF Research predicted that UR and charters rates would not be staging meaningful improvements throughout 2017.

MIDF Research believed that the rock bottom valuation for offshore service providers could prolong.

Additionally, it suggested that these very providers could continue to trade at a steep discount compared with its downstream counterparts.

Therefore, MIDF Research concluded with a negative stance towards the upstream sub-segment.

By contrast, it adopted a positive stance on the downstream sub-segment as continuous growth due to Petronas’ committed capital expenditure plan focusing on downstream oil and gas segment.

The research house recommended exposures into Gas Malaysia Bhd Petronas Dagangan Bhd. safe and