KUALA LUMPUR: Shares in oil and gas (O&G) companies rose further yesterday as the run-up since the start of the year continued, supported by the optimism of a pick-up in domestic activity.

However, it remains to be seen whether the uptrend will continue in the near term.

Year to date, the Bursa Malaysia Energy Index has risen 45% from 820.36 points at the start of the year, to 1,196.49 yesterday.

Among the top gainers so far this year are KNM Holdings Bhd (up 506.67%), Dayang Enterprise Holdings Bhd (up 251.85%), Petra Energy Bhd (up 245.68%) and Carimin Petroleum Bhd (up 228.4%).

The rise in O&G counters has not been in tandem with crude oil prices, seeing as Brent crude futures had retreated from around US$74 per barrel in April to around the US$60 per barrel in the second half of the year. At the time of writing, Brent crude was trading at US$62.50 (RM258.75) per barrel.

On the other hand, the share prices of these companies were driven by positive leading indicators, as well as national oil major Petronas’ guidance of higher capital expenditure (capex) in the latter half of the year.

UOB Malaysia analyst Kong Ho Meng pointed out that the leading indicator — the jack-up rig count — has seen an increase from earlier in the year, pointing to improvement in upstream activity.

He said the jack-up rig count across Malaysia and the Joint Development Area have increased from nine in February to 16 in September this year.

“These 16 finally meet the high 16 to 19 jack-up rig demand outlook forecast that Petronas stated in their Activity outlook 2019-21.

“Petronas specifically said that the high rig demand is due to higher need for brownfield activities. Hence, brownfield and maintenance players like Dayang are guiding exceptionally strong 3Q,” said Kong.

However, whether the climb in O&G stocks can be sustained depends on the upcoming Petronas activity outlook for 2020-2022, likely to be released in December, he said.

“Otherwise, stock earnings might decline and investors should take profit,” he said.

In a recent note dated Nov 4, Affin Hwang Capital analyst Tan Jianyuan had advocated for investors to take profits amid the sector run-up, as the fourth and first quarters of the year are seasonally weak periods amid the monsoon.

He said that corporate earnings will be the focus this month and that maintenance and rig players could post stronger third-quarter results, benefiting from higher job flows.

“We gather that offshore maintenance players are likely to post strong 3QFY19 profits. These include maintenance, construction, modification contract beneficiaries like Deleum Bhd, Carimin, Dayang and Petra Energy,” said the analyst.

Tan said the research house prefers companies with more exposure to brownfield work with good earnings visibility, including Dialog Group Bhd, Serba Dinamik Holdings Bhd, Velesto Energy Bhd, Bumi Armada Bhd and Kelington Group Bhd.

“However, in view of the recent sector run-up and some stocks under our coverage nearing its fair values, we recommend to take profit on upcoming strong third quarter results announcements as the fourth and first quarters are seasonally weak due to monsoon,” he said.

He also highlighted that Petronas had significantly underspent on capex in the first half of the year, totalling RM16 billion or 32% of its full-year commitment of RM50 billion.

Petronas had maintained its guidance of RM50 billion capex spending for the year, half of which is allocated for domestic projects, which Tan said indicates its commitment to roll out more contracts in the coming months.

“We believe activities will remain robust, with domestic upstream capex also guided to be higher at RM15 billion versus RM8 billion in 2018,” he said.