O&G counters may correct before rising again

Written by Gan Yen Kuan

KUALA LUMPUR: Oil prices may have run ahead of the demand-and-supply fundamentals, which could result in near-term correction of crude oil prices and the share prices of oil and gas (O&G) stocks, according to Standard & Poor’s (S&P) vice-president and head of Asia equity research Lorraine Tan. As excess supply exists while inventory levels remain high, an output cut by Opec could provide some ceiling and potential downward pressure to the recent rise in oil prices, she said. However, as exploration activities were expected to resume towards the end of the year due to current oil price levels, she said O&G counters could later benefit from potential awards of contracts. “That [oil prices staying at US$70 (RM247) to US$75 per barrel] means oil companies don’t have that much pressure to cut their exploration budget. Obviously we have seen some delays in contract awards but I think those would hopefully resume towards the end of the year with prices at this level. “We will first see some consolidation and profit-taking in this sector, before it moves up,” she said at a media briefing last Friday. The anticipated correction was also partly due to the fact that the energy sector had significantly outperformed the broader market in the first half (1H) of the year, with median performance up 106.9%, more than four times the market gain in 1H. S&P Equity Research expects WTI crude oil prices to average US$56 per barrel this year and US$63 per barrel next year. Its top picks in the sector are SapuraCrest Petroleum Bhd due to its “unique asset positioning and strong earnings growth”, and Alam Maritim Resources Bhd for its track record in earnings delivery. Meanwhile, RHB Research head of research Lim Chee Sing said while there were speculative elements in the rise of oil prices recently, the rise also reflected improving confidence among investors. “The global economy has passed its worst. Although there are contractions, they are at a smaller magnitude. We are in a healing process and future prospects improve. Investors begin to take position in commodity futures,” he told The Edge Financial Daily via telephone. He noted that high-cost O&G projects that were delayed could be reviewed as they “became viable again” at current oil price levels. “The improving prospects will propel the O&G sector,” he said. RHB Research expects oil prices to trade in the range of US$60 to US$70 per barrel for the rest of the year. This article appeared in The Edge Financial Daily, June 29, 2009. >>>>>