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.
