Published May 6, 2009

Malaysian oil and gas stocks are on a roll

Sector now trades at 9 times forward earnings against 6 just two months ago

By S JAYASANKARAN
IN KUALA LUMPUR

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RISING oil prices, an improved global sentiment and slowly increasing orders have cumulatively caused Malaysian oil and gas stocks to rise across the board. Standout statistic: the whole sector currently trades at nine times forward earnings compared to six times two months ago.

The counter that seems to be generating the most excitement is service and equipment provider KNM Group, which has seen trading volumes of between 100 million and 200 million shares daily. Its share prices have almost doubled from its lows and it currently trades at around RM0.69 apiece. The price reflects the fact that there are almost four billion shares outstanding.

The excitement gripping the oil and gas sector in Malaysia underscores the wider euphoria in global equity markets as the signs of a recovery manifest themselves in places from China to the United States. 'No one's sure if it's a bear rally or a genuine bull,' a fund manager told BT. 'But nobody wants to miss out so they are all jumping back in.'

The benchmark index of the Kuala Lumpur stock market has jumped 25 per cent in the last two months.

Even so, it appears to be sound. For 2008, the firm posted a net profit of RM337 million (S$141 million).

According to Jon Oh, an analyst with CLSA Asia-Pacific, KNM has a RM3.85 billion order book that will last it 17 months and has bid for RM18 billion of contracts worldwide.

Mr Oh thinks that, going by track record, the firm has 'a good chance' of securing RM3.2 billion of new orders. Mr Oh has called a 'buy' on the stock because he thinks it's relatively cheap - it's trading at 5-7 times forward earnings compared to its three-year mean of 13 times.

But some oil executives wonder if it's all hype.

'Fundamentally, nothing has changed,' a chief executive of a listed oil and gas company told BT. 'The big boys are either cutting orders or squeezing our margins to cut their costs.'

To be sure, contract terminations have become the norm over the last year. In early May, Keppel Corporation announced that it had received a termination notice from GSP Titan on a S$181 million contract to build a ship. Early this year, Scorpion Offshore cancelled a S$405 million contract with Keppel to build a semi-submersible rig.

Even so, oil analysts are undiminished in their enthusiasm. 'There are signs that orders are beginning to trickle in,' AMMB Banking noted in a research report. 'Globally, stock market sentiments have risen against a backdrop of decreasing risk aversion.'

Mr Oh concurs. 'This is a long-term business and we think oil prices will only go up going forward,' he says. 'We see oil at US$55 this year and at US$76 next year. That can only be good for the players.'