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Wednesday, December 10, 2014

The O&G Stocks ... Can Load Up Now?

As oil prices continue to slide, industry observers foresee that the selling pressure on Malaysia oil and gas counters will not abating yet.

There could be another round of selling pressure among investors with short to medium term view of up to six months from Dec 2014 especially on financially weaker O&G companies.

The rationale behind this that we have only seen about two months (Nov – Dec 2014) price deterioration of oil, but in terms of business deterioration, it is only starting now (Dec 2014). Financial results going forward will be severe for those exposed to the vagaries of oil price and O&G capex.

This is a naturally high geared industry. The access to funding now (Dec 2014) will be challenging from an equity, bond and loan perspective, even if oil stays at the USD65 level. Even among O&G companies, some will start worrying about counterparty risk.

Investors will need to sit via some large swing in share prices given and the changing nature of the industry and have at least a one year time horizon to see through the down cycle.

The call on oil price which will still determine the sector in the near term has been very unreliable and difficult due to the many moving parts along the O&G chain.

One needs to predict government policy, global supply and demand, financial speculation and currency movements to come to a conclusion on oil price. The fact that 99% of the industry got its forecast wrong on oil price less than six months ago tells you how hard it is to predict the point where oil price will bottom out.

There could be at least another month of selldown in the near term as crude oil has not really found its stabilizing point.

Even if oil price fall to USD40, it will be hard to stay there for long as there will be a lot of supply disruptions at that level and that the market will adjust itself within a year.

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