Beaten down O&G stocks offer buying opportunities

SapuraKencana Petroleum Bhd's tender rig T-20

KUALA LUMPUR: The volatility in crude oil and fall in oil and gas (O&G) share prices have opened a window of opportunity to trade beaten down stocks, according to Maybank Investment Bank Research.

“We  upgrade  Icon,  Perisai Petroleum Teknologi Bhd,  SapuraKencana Petroleum Bhd (SapKen)  and  UMW O&G  to  trading buys with unchanged target price. These stocks, in our view, are oversold, attractively valued, high beta proxies to any potential rebound in oil prices and weaker US dollar,” Maybank IB said.

The research house said the steep correction in share prices offers periodic, alpha opportunities to pick up oversold, undervalued and sentiment depressed stocks.  

“In our view, concerns over potential kitchen  sinking  exercises and incoming poor fourth quarter 2015 results have largely been priced in, from the recent selldown. Valuations of certain stocks like Icon, Perisai, SapKen and UMWOG have turned attractive, with some trading below 1x EV/replacement value,” Maybank IB said.

The 16% fall in crude oil price in 2016 year-to-date (dated Brent) to sub-US$30 per barrel, lifting of international sanction against Iran, Petronas’ RM50bil capital expenditure cut and stronger US dollar have sustained the volatility and weakness in the O&G sector.

“All the O&G stocks under our coverage have experienced a 7%-21% fall in share prices in 2016 year-to-date and underperformed the KLCI.

“With the steep plunge in oil price, the likelihood of an asset impairment exercise in fourth quarter 2015 is looking more likely. Icon, Perisai, Sapken and UMWOG are possible candidates, in  our  view. Nonetheless, these remain accounting and non-cash flow item,” Maybank IB said.