KUALA LUMPUR (Jan 12):  Oil and gas (O&G) stocks advanced on Bursa Malaysia on Wednesday on the back of rising crude oil prices, resulting in the energy index emerging as the best performer among the exchange's indices.

In contrast, the exchange’s benchmark FBM KLCI index closed 1.09 points or 0.07% lower at 1,563.2 dragged by losses in banking and plantation heavyweights.

The energy index, which tracks O&G counters, closed up 1.69% or 12.31 points at a near two-month high of 740.66, after having earlier risen by as much as 2.1% to 743.94.

Of the index’s 25 component stocks, 16 advanced against four which closed lower and five which finished unchanged, according to Bloomberg.

The index’s rise came as overnight Brent crude oil price leapt by nearly 3.5% or US$2.85 to US$83.72 per barrel, its highest level since early November.

The oil price was buoyed by tight supply and expectations that rising Covid-19 cases and the spread of the Omicron variant will not derail global demand recovery, according to Reuters.

On Wednesday, the Brent price continued its uptrend. It was up 60 cents or 0.72% at US$84.32 per barrel as at 9.30pm.

The higher Brent price fanned interest in O&G counters on Bursa Malaysia.

Dialog Group Bhd was the largest index mover in percentage terms (44.28% or 5.45 points), followed by Bumi Armada Bhd (13.9% or 1.71 points), and Hibiscus Petroleum Bhd (11.02% or 1.36 points).

Other major index movers included Dayang Enterprise Bhd (9.08% or 1.12 points), Icon Offshore Bhd (4.24% or 0.52 points), Petron Malaysia Refining and Marketing Bhd (3.39% or 0.42 points) and Carimin Petroleum Bhd (2.2% or 0.27 points).

In terms of share price performance, Petron gained the most in terms of value (eight sen or 1.85% to RM4.40) followed by Carimin (six sen or 8.45% to 77 sen), Dayang (five sen or 5.65% to 93.5 sen).

Analysts covering the O&G sector have a positive view on the sector and expect the local energy counters to rise on the anticipated better activities in 2022 fuelled by higher capital spending from Petronas.

Maybank analyst Liaw Thong Jung, who has maintained a positive view on the O&G sector, expects consumption, production and oil prices to trend higher in 2022.  

Liaw said the research outfit’s estimate sees 2022’s Brent price at between US$75 and US$80 per barrel. He also sees upside risk to oil price assumption should the global energy crunch worsen.

“That said, global capital spending is set to rise, guided by capital discipline and investment returns. The increased capex spend is not a surprise, as it comes off a low base in 2020 and 2021 and is nowhere near 2014’s levels,” he said in a recent investment strategy note.

Liaw said Yinson is a key pick for the sector, as the company stands out for its growth prospects and leadership in the floating production, storage and offloading (FPSO) business globally, operational and financial strength, most comprehensive and clear sustainability agenda, and undemanding valuations.

He also likes Dialog and Wah Seong Corp Bhd. He said Dialog will develop greater traction at its Pengerang operation on new capacity uptake with long-term development prospects, while Wa Seong’s push ahead will come mainly from its pipe-coating projects in Qatar and Malaysia.

RHB Research analyst Sean Lim was also bullish on the O&G sector, maintaining his “overweight” call on the sector.

“The upward revision of activities guidance in the latest Petronas Activity Outlook (PAO) 2022-2024 may suggest that upstream activities should recover with a greater momentum in 2022.

“(Hence) we estimate Petronas’ capex spending to be RM40-45 billion in 2022, with a continuing re-deployment of resources to renewables,” Lim said in a research note dated Jan 4.

In addition, Petronas is allocating an annual average capex of RM20 billion for upstream activities between 2022 and 2027, of which 40% is for the international division. This points to a strong increase from RM9.4 billion, which leads Lim to believe the domestic upstream space will be the beneficiary as the result of increased spending

Notwithstanding that, Lim expects further downward revisions in crude oil demand by major agencies in the coming months, due to the re-implementation of lockdown measures in response to the emergence of new Covid-19 variants. He anticipates the Brent price to be at US$69 per barrel in 2022 and US$65 in 2023.

“That said, we believe the market will have factored in the impact of Omicron to a certain extent. Supply pressures will remain in 2022, but OPEC’s strategy is still very price-positive — especially when oil prices are down — as the cartel is ready to adjust production levels to support prices,” he added.

Lim’s top pick stocks for the sector are Petronas Chemical Group Bhd (PetChem) and Bumi Armada. He picked PetChem due to its attractive valuation, while Bumi Armada was chosen largely based on its resilient earnings from operating FPSOs and improving balance sheet.