Oil & Gas Sector: Cherry picking in an era of low oil price

KUALA LUMPUR: AmResearch has re-initiated its coverage on the oil and gas (O&G) sector with a Neutral rating and favoured Dialog and Bumi Armada.

In a note on Monday, the research house said despite the recent nascent rebound in share prices of the oil and gas companies – lifted by improved sentiment due to a recovery in oil prices off the lows – it is too early to turn constructive on the sector.

"Our base case is that oil prices would be bouncing along the bottom at US$55/barrel – in line with the government’s projection.

"Our primary concern centres on the lagged impact of a steep collapse in oil prices and subsequent capex cuts by the oil majors, on earnings and balance sheet of the O&G companies. 

"In the coming quarters, we expect to see weak earnings delivery and perhaps the impact of impairment of assets that were acquired when oil prices were at elevated levels. However, we do see some value emerging after the steep selldown," it said.

The research house noted that it believed valuations have yet to discount further earnings and impairment risks ahead. 

The risk of impairment would be an overhanging concern on select stocks that have acquired assets at relatively high prices, given the sharp fall in the oil price.

"We prefer established companies that are exposed to the production phase with long-term service contracts and recurring income, as these are less sensitive to the oil price fluctuations.

"We also like FPSO players for good earnings visibility underpinned by the long-term nature of FPSO contracts," it said.