Shares of Malaysian oil and gas (O&G) companies saw renewed interest this week, as international benchmark Brent crude temporarily topped the psychological barrier of US$80 per barrel on Tuesday due to rising energy undersupply concerns.

The Bursa Malaysia Energy Index retreated slightly on Wednesday after a two-day jump as oil prices hit a three-year high. However, the index is still up 4.82% from last Friday’s closing.

Week-to-date, the sector’s top active counters included Dagang NeXchange Bhd, KNM Group Bhd, Serba Dinamik Holdings Bhd, Bumi Armada Bhd and Sapura Energy Bhd. Top gainers during the period included Petronas Dagangan Bhd, Yinson Holdings Bhd and Hengyuan Refining Co Bhd.

Oil prices have been buoyed by the rally in natural gas and coal ahead of the winter season and as global economic recovery is expected to fuel demand. A drop in US oil inventories, which are at their lowest levels since 2018, has helped drive oil prices higher.

According to industry observers, the sustainability of oil prices at this level will depend on how soon Covid-19 becomes endemic and the global economic engine could ride a smoother recovery path.

Oil bulls may also point to some countries having been slow to match the Organization of Petroleum Exporting Countries’s quota to add another 400,000 barrels per day until end-2021 due to under-investments in the last decade.

Goldman Sachs has raised its year-end forecast to US$90 per barrel from US$80 per barrel previously, while global trading firm Trafigur sees oil trading higher to US$100 in late-2022 citing global demand recovery.

Refinitiv Oil Research (Asia) director Yaw Yan Chong, when contacted, is slightly more conservative. He pointed to the aftermath of Hurricane Ida in the US, which has knocked out sizable crude output from the Gulf of Mexico.

This is notably so from the region’s largest producer, Shell, which has lost about 40% of its production capacity, or 28 million barrels, and which will only be fully restored early 2022, Yaw told theedgemarkets.com.

“However, output is gradually being restored, and I don’t think this should be a reason for prices to hit the US$80 per barrel mark. If it does, it will be because of sentiment, not fundamentals,” said Yaw.

“Demand from Asia, if anything, remains on the wane and under pre-pandemic levels, with the region’s major economies all still under some form of lockdown or other, and China’s oil imports being curbed by government restrictions.

“We expect some uptick to crude imports from September and for the rest of 4QCY21 amid the peak demand winter, as reflected by September imports notionally assessed at 101.43 million tonnes, the highest since March, but still well below pre-pandemic levels,” Yaw said.

He added that refineries in three of Asia’s top four centres — India, South Korea and Japan — are also running at below average capacity levels and are likely to stay that way for the rest of the year, with August capacity utilisation at between 76% and 87%.

Further, Yaw sees little link between oil and power generation.

“The alternative power-generation fuel to gas is actually fuel oil, a bottom-of-the-barrel residue, whose production and potential for increase in yield are usually limited as its margins are usually negative.

“Fuel oil is also normally used as marine fuels, and the fuel oil market has indeed tightened in the wake of this surge in power-generation demand; but it is unlikely to lead to an increase in refinery runs, or consequently, an uptick in crude demand,” he said.

Mixed report card keep O&G shares suppressed

For local O&G services players, what matters is the assumption of oil majors and national oil companies — who have remained largely conservative on planning basis — and in turn, in their capital investments.

While the current elevated oil price extended an over 110% gain seen from around US$37 per barrel in November 2020, shares of local services companies had not tracked the impressive rally.

Bursa Malaysia’s Energy Index had come off its 10-month low on Sept 22, and just a few counters are trading close to their one-year highs as Covid-19 lockdowns and operating procedures subdued earnings.

The index is still down 37% from its pre-pandemic levels — in part due to the steep 78% decline in the share price of former industry darling, Serba Dinamik, amid audit concerns faced by the company earlier this year.

AmBank Research in its Sept 7 note said capital expenditure (capex) by national oil firm Petroliam Nasional Bhd (Petronas) in the first half of 2021 (1H21) appears to be below its capex plans at RM12.7 billion, which accounts for 28%-32% of its annual target of RM40-45 billion.

Citing mixed report cards in 2Q2021 among companies under its review, the research house, however, maintained ‘overweight’ on the sector, citing improving balance sheet, compelling valuation and dividend yields, and improved industry prospects for select counters.

HLIB Research, in its note dated Sept 2 is expecting Petronas to ramp up its capex spending in 2H2021 “as its financial performance has improved significantly and this is expected to benefit most O&G services companies in Malaysia”.

For RHB Research, it has an “overweight” stance on the O&G sector as it sees exploration and production and petrochemical companies continuing to enjoy a strong recovery in earnings this year — riding on better commodity prices — while services players should gradually benefit from higher domestic capex allocations.

Its top picks are MISC Bhd, Petronas Chemicals Bhd and Bumi Armada Bhd.

In its Sept 29 report, it increased its Brent crude oil price projections for 2021 and 2022 to US$71 per barrel and US$69 per barrel respectively from US$68 and US$65 per barrel previously, while maintaining its long-term crude oil price forecast at US$60 per barrel.

One company that will post their financial results on Thursday (Sept 30) is integrated upstream group Sapura Energy Bhd for its second financial quarter ended July 31, 2021 (2QFY22). The group remained in the red in 1QFY22, posting a net loss of RM97.07 million, and analysts are largely mixed on whether this is a turnaround year for the company.

In hindsight, local O&G companies performed well in terms of earnings and share price in 2019 when oil prices stabilised at US$60-70 per barrel range, with share prices rising 60% in that year. With Brent averaging at US$67 per barrel year-to-date, it certainly spells hope for the O&G players.