Bottom fishing in O&G stocks

WHILE Malaysia’s listed oil and gas (O&G) providers have occasionally delivered returns to investors, the sector is looking dour today.

Bellwether player Dialog Group Bhd is doing a massive kitchen-sinking exercise and investors aren’t impressed, selling down the stock by about 8% in the last month alone, bringing it down to RM1.48 at the time of writing.

Then, there is Sapura Energy Bhd, once a top O&G stock but now struggling to pay its vendors and relying on a government cash injection of RM1.1bil to do that.

No wonder the O&G sector’s price-to-earnings (PE) is much lower than, say, the renewable energy sector, which has been basking in the spotlight and drawing significant investor attention.

But could the O&G sector’s undemanding valuation put it back on the radar of investors?

After all, shouldn’t US president Donald Trump’s “drill baby drill” philosophy give a shot in the arm for the O&G sector?

The KL Energy Index, which tracks the performance of Bursa Malaysia’s energy-related stocks, is down some 11%

year-to-date, a two-year low.

In comparison, FBM KLCI is down by 7% as the sell-off in equity markets deepened due to trade tensions.

Contributing factors include a decrease in Brent crude oil prices, which have slipped 11.5% from nearly US$80 per barrel

in January to the US$70 level

at present.

Rakuten Trade’s head of equity sales Vincent Lau is one of those drawn to the sector’s low valuations. He notes that the sector currently trades at around 12 times historical earnings and believes some stocks are attractively priced.

These offer growth and yield opportunities for investors, he says.

Despite growing investments in cleaner energy sources, O&G will continue to play a significant role in the energy mix for the foreseeable future, he says.

According to him, sentiment

on the sector has been dragged down by underperformers like Dialog and PETRONAS Chemicals Group Bhd (PetChem), both of which are trading below their Covid-19 levels.

However, the industry has to contend with uncertainties and the new norm of lower oil prices.

Rakuten expects the Brent crude oil price to average between US$70 and US$75 per barrel in the first half of 2025.

Major global banks such as Goldman Sachs Group Inc, Citigroup Inc and Morgan Stanley have slashed their oil price forecasts in recent weeks.

Coming back to Malaysia, Rakuten thinks PETRONAS’ capital expenditure (capex) cuts are likely to be less severe than projected, supported by increasing regional activity in 2025.

“Domestic upstream services are seeing robust demand from the national oil company as well as other oil producers. However, the downstream segment is likely to remain sluggish due to global overcapacity and a slow demand recovery.”

Rakuten has a few stocks on its list – Yinson Holdings Bhd, Dayang Enterprise Holdings Bhd, Keyfield International Bhd and Bumi Armada Bhd, which recently reinstated its dividend payouts, signalling improved financial health.

The brokerage house expects offshore support vessel chartering player Keyfield International to pay a dividend of 11.5 sen for the financial year 2025 (FY25), translating to a yield of 6.3%.

Kenanga Research is of the view that valuations have “over-corrected” due to the large

misses in the O&G downstream segment.

“While the oil price outlook appears more tepid in 2025, we still believe that the valuation discount is unjustified, given that the sector fundamentals remain intact and the players under our coverage still have a comfortable balance sheet with some in net cash positions,” the research house notes in a report dated March 11.

Kenanga Research says the upstream services industry is still in an upcycle in terms of their fundamentals with margins expected to be maintained or higher in FY25, particularly for maintenance-focused players.

“But the recent deterioration in overall market sentiment continues to bring valuations

of the small to mid-cap service players down to PE ratios of six to eight times on average, with most of them trading below one standard deviation (1SD).”

It points out that both Dayang and PetChem are trading at levels lower than during the pandemic period. Kenanga Research believes the negatives have already been priced in, setting the stage for potential upsides for both stocks this year.

One other stock that features on the list favoured by brokerages is Deleum Bhd. MIDF Research likes the provider of specialised equipment and technical services for its stable operations and strong track record of paying dividends.

It says Deleum is currently embarking on mergers and acquisitions, geographical expansion and investments in early-stage companies to drive future growth.

Outside the country, the US trade tariffs, while still not in full swing, would negatively impact the O&G sector in terms of supply chain disruptions which may result in higher raw material costs and subsequently hiking of operational costs.

Tariffs may also reduce demand for petroleum products, particularly from China, which could affect the midstream and downstream divisions, say analysts.

Here lies an opportunity for Malaysia.

As a neutral trade partner

to many, it can leverage on

the shifts in the global energy market, say analysts.