DESPITE crude oil prices having scaled sizzling heights of late, equity prices of oil & gas (O&G) stocks have seemingly not moved in tandem.
To recap, Brent crude prices surged 41% to US$138/barrel from US$98/barrel on Feb 25 this year just prior to the Ukraine invasion by Russia before subsequently fallen by 18% to US$113/barrel currently.
Instead, the volatility in crude oil prices following the Russia-Ukraine conflict has triggered divergent equity trends for the stocks under AmResearch’s coverage.
This is given the unexciting roll-out of fabrication jobs by oil majors amid pandemic-inflicted logistics disruptions while rising sanctions against Russia have further catalysed elevated commodity prices which can consequently trigger stagflation worries that could dampen global oil demand.
“This was further exacerbated by fresh COVID-19 lockdowns in several cities, especially Shenzhen, Shandong, Guangdong and Jilin, in China, prompting fears of another round of supply disruptions,” opined analyst Alex Goh in an O&G sector outlook.
“Since the beginning the year, Brent oil price has risen by 46% and only Hibiscus Petroleum Bhd which has direct exploration and production exposure has kept pace with a jump of 41% while service provider Dialog Group Bhd rose by only 6% and Petronas Chemicals Group Bhd (+5%).”
Elsewhere, MISC Bhd was flat given that petroleum tanker rates remained subdued from the persistently low shipping volumes as OPEC struggled to meet its own production quotas while the share price of Bumi Armada Bhd which bears an extended balance sheet fell 11%.
The worst performance came from Yinson Holdings Bhd which is currently undertaking a rights issue.
“Even so, we believe the correlation between equity and oil prices will improve given our unchanged optimistic outlook on the sector as the impending supply crunch will sustain elevated oil prices, eventually catalysing increased spending by oil majors,” reiterated AmResearch.
“Further underpinning our outlook, the International Energy Agency’s (IEA) March report estimated that the global oil market could lose three million barrels/day of supply from Russia starting in April as sanctions on banks and buyers’ reluctance to purchase Russian oil could result in the biggest oil supply crisis in decades.”
Moving forward, the research house expects selected segments in the value chain to be better positioned to benefit from higher oil prices and projects sanctioned by national oil companies.
“Operators directly exposed to upstream production such as Hibiscus Petroleum and the floating production storage and offloading (FPSO) sub-sector stand to benefit given the decimated number of operators during the previous downturn in 2015-2017,” noted AmResearch.
All-in-all, AmResearch maintained its “overweight” outlook on the O&G sector as it expects escalating crude oil prices and rising global demand to catalyse faster order flows across the value chain.
“We continue to like Hibiscus Petroleum’s direct upstream exposure to higher crude oil prices and Dialog Group’s expanding, yet resilient non-cyclical tank terminal and maintenance-based earnings base,” justified the research house.
“Meanwhile, Petronas Gas Bhd offers highly compelling dividend yields from its optimal capital structure strategy and resilient earnings base.” – March 21. 2022
Pic credit: Reuters
