No Relief Seen for Malaysia’s Energy Stock Drop on Earnings

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Investors looking for bargains among Malaysia’s tumbling energy stocks say it’s too early to buy as oil’s slide to a six-year low pummels an industry that accounts for about a fifth of the nation’s exports.

SapuraKencana Petroleum Bhd., the country’s biggest oil and gas services company, has tumbled 46 percent in Kuala Lumpur trading in the past 12 months as peers Bumi Armada Bhd. and UMW Oil & Gas Corp. both lost at least 48 percent. Analysts have cut recommendations on the stocks to the lowest levels since at least 2013, while Malaysia’s state energy company announced spending cuts of as much as $8.1 billion last month.

The FTSE Bursa Malaysia KLCI Index’s 117 percent rally from its 2008 lows, the world’s longest bull market, is coming under pressure as crude’s slump weighs on Asia’s only major oil exporter. Samsung Asset Management Co., CIMB-Principal Asset Management Bhd. and Eastspring Investments Bhd. have been reducing their Malaysian energy holdings on concern valuations near record lows don’t yet compensate investors for this year’s deteriorating profit outlook.

“All the signs are there for bad earnings,” Alan Richardson, whose Samsung Asean Equity Fund has returned an annualized 19 percent during the past five years, beating 96 percent of peers tracked by Bloomberg, said on March 17.

Oil and gas companies have been among the biggest losers in Malaysia’s $442 billion stock market as the KLCI index slipped

1.1 percent during the past 12 months through Wednesday, versus a 0.7 percent gain in the MSCI Emerging Markets Index. Bumi Armada’s 57 percent slump is the worst in the Bloomberg World Oil & Gas Services Index, which track 38 of its global rivals.

SapuraKencana fell 0.9 percent and Bumi Armada declined 1 percent at the close in Kuala Lumpur, while UMW Oil & Gas gained

1.9 percent. The KLCI Index climbed 0.6 percent, its steepest advance in almost five weeks.

Petronas Cuts

Petroliam Nasional Bhd., known as Petronas, reported a fourth-quarter loss of 9.9 billion ringgit ($2.7 billion) on Feb. 27 and said it will cut capital investments and operating expenditure. The company, which manages the country’s energy reserves, will delay projects including a gas-processing plant and stop ventures with other energy firms to develop smaller oil fields.

“The biggest concern is still the Petronas cuts,” said Raymond Tang, the Kuala Lumpur based chief investment officer for the Asean region at CIMB-Principal Asset Management Bhd., Malaysia’s second-largest private asset manager. “There will be further unwinding of positions.”

Projected 12-month earnings for Bumi Armada were cut to 1.9 sen (0.005 cents) per share last month from 4.4 sen in September, according to the average of 20 analyst estimates compiled by Bloomberg. The stock trades at 12.4 times estimated profits, compared with the one-year average multiple of 15.7.

Price Targets

The consensus analyst recommendation for SapuraKencana has dropped to the lowest level since August 2013 as RHB Capital Bhd. and JPMorgan Chase & Co. cut their share-price forecasts in the past three months. Recommendations for UMW reached the lowest since the company’s November 2013 initial public offering last month.

CIMB-Principal, which manages about $17 billion, sold 11.6 million shares of SapuraKencana in January and 5.9 million shares of UMW in December, data compiled by Bloomberg show. The investment firm offloaded its remaining 284,200 Bumi Armada shares in October.

Samsung Asset’s Richardson said he sold holdings in oil and gas companies in Malaysia, Thailand and Singapore in December and has no plans to rebuild positions.

Really Scary

Eastspring Investments, which oversees $7.5 billion, has been reducing its energy holdings since late last year.

“I’ve seen reports on oil and some are really scary on how low prices can go,” said Chen Fan Fai, the chief investment officer at Eastspring Investments, whose small-cap fund returned 16 percent in the past year, beating 90 percent of peers.

Not everyone is selling. Aberdeen Asset Management Sdn. has used the rout to add positions in the industry for the first time, Gerald Ambrose, who oversees the equivalent of $3.6 billion as managing director of Aberdeen’s Malaysian unit, said by phone from Kuala Lumpur.

“We never had any before as they were expensive -- it’s been like catching a falling knife,” Ambrose said. “We are comfortable with our holdings for the long term.”

SapuraKencana’s diversification strategy will help it withstand the oil and gas spending cuts as most of its orders come from overseas, the company said by e-mail. Bumi Armada and UMW declined to comment.

Malaysia’s oil and gas stocks, which trade at an average

17.7 times projected 2016 earnings, aren’t bargains yet because spending cuts by Petronas will weigh on results for two years, CLSA Ltd. wrote in a report on March 10. The stocks still trade at an 10 percent premium to the benchmark KLCI index.

“We are not out of the woods,” CIMB’s Tang said. “There are still a lot of headwinds.”