By Khairie Hisyam
As global oil prices plunged, so did valuations on Bursa Malaysia, with double-digit billions wiped out in a matter of months. KiniBiz takes a closer look on what led to the rout.
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At the closing bell on Tuesday, Dec 9, the collective market capitalisation of 17 oil and gas counters on Bursa Malaysia was at RM46.6 billion, 41% lower than where they were when the morning bell rung on July 1.
This means that in a little over five months since crude oil prices peaked in June, some RM33.7 billion in market value had been wiped out as panicking investors sold down on oil and gas stocks.
The selldown runs parallel to plunging crude oil prices over the same period. From their respective peak prices in June, both Brent and West Texas Intermediate (WTI) dropped to five-year lows yesterday, Bloomberg reported, hitting US$65.29 (RM227.79) and US$62.25 per barrel respectively for January settlement.
In comparison Brent futures peaked at US$$115.01 per barrel in mid-June while WTI futures hit US$106.43 per barrel.
While reports at the time linked the peak prices to fears over conflict involving the Islamic State in Iraq, the fall in prices since was driven by an oversupply of crude oil in the global market.
Rise and fall
The decline of crude oil prices since June this year can be traced back to a combination of easing tensions in Libya as well as slowing demand from Asia, particularly China. But first let’s look at how prices have moved in the recent past.
After hitting record highs in mid-2008 – with Brent futures hitting US$146 per barrel on the ICE Futures exchange – prices plunged below US$50 per barrel levels by the end of that year.
Among others, this was sparked by a statement by then-United States president George Bush lifting an executive order banning offshore oil drilling to boost supply, reported CNN. This in turn would reduce the burden on Americans paying high pump prices, said Bush in urging the US Congress to follow suit.
A boom in US oil production followed. According to data from the US Energy Information Administration (EIA), the country’s annual crude oil production surged by 48% from 1.83 milion barrels to 2.71 million barrels by 2013, a level not seen since the late 1980s.
In parallel with surging production from the US however is turmoil in key oil producing regions – Libya, for example, faced civil war while Iran was slapped with an oil embargo by the European Union (EU) in 2012 on top of US sanctions – which in turn negated the impact of increased US production on global prices.
This culminated in prices breaching US$100 per barrel in early 2011 and staying above that threshold until June this year.
However from mid-June this year, oil from Libya began flowing in greater volume, more than tripling from 200,000 barrels daily to 900,000 barrels per day by end September.
The production surge is an important factor in depressing Brent prices, said the EIA, although weakening demand also plays a role.
In Asia, the world’s largest petroleum consumer according to the US EIA, slowing growth in China and disappointing economic figures from Japan add pressure to oil prices while in Europe fears of a triple-dip recession grew.
By mid-September, prices dipped below the US$100 per barrel threshold for the first time in more than three years. Brent prices dropped further to the US$80 per barrel region by mid-November.
Price war across the Atlantic
Rapidly falling prices meant all eyes were on the Organisation of Petroleum Exporting Countries (Opec) ahead of a meeting in Vienna on Nov 28 to see if the group would cut supply.
Created in 1960, Opec comprises of 12 member countries at present and its collective oil production counts for 40% of global supply. Given the organisation had previously adjusted its oil output to counter unfavourable movements in global oil prices, the possibility of another supply cut was in the air.
However, a supply cut was far from a certainty. In early November, prior to the Vienna meet, Saudi Arabia cut its crude oil prices for American refiners in an apparent bid to assault the growing position of shale oil in the US refining market, which had been taking away some of Saudi Arabia’s market share as US crude production surged to its highest since the late 1980s.
In response, US shale oil producers stood firm, reported Bloomberg, with several larger producers vowing to maintain and even increase output. This effectively means that a price war was underway across the Atlantic.
Ali al-Naimi
By Nov 28, the declaration of war became official: Saudi Arabia’s oil minister Ali al-Naimi exhorted fellow Opec members to maintain production levels in order to depress prices and undermine the profitability of US shale oil players to regain market share.
After five hours of talks and despite the wishes of smaller Opec producers to cut supply in order to halt falling prices, Saudi Arabia, who is the single largest producer and exporter within Opec at about 30% of collective output, got what it wanted. Opec will maintain its output ceiling of 30 million barrels a day until its next meeting in June 2015 at least.
This figure is at least one million barrels more than Opec’s own estimate of global demand for its oil for the first half of 2015, reported Reuters.
Following the decision, prices tumbled further to five-year lows as the US oil production scene signals growing output to come, according to Bloomberg. In other words, US oil producers is taking up the Opec gauntlet.
Oil and gas rout on Bursa
On Bursa Malaysia, the benchmark FBM-KLCI index began declining in mid-July after peaking at 1,892.65 points on July 8 this year. As global oil prices went below US$100 per barrel in mid-September, however, panic selling began to set in. This resulted in the index dropping sharply all the way down to 1,767.77 on Oct 16.
Since then, the benchmark index had seen relatively more volatility. However, around the time of the Opec meet in Vienna, state-owned oil corporation Petroliam Nasional Bhd (Petronas) announced on Nov 28 that it is looking to cut its capital expenditure by 15%-20% in 2015 given the low oil price environment.
This sent FBM-KLCI into its worst single-day drop in nearly two years, losing 2.3% to end Monday, Dec 1 at 1,778.27 points compared to 1,820.89 points on Friday, Nov 28. Yesterday, the benchmark index dropped further to 1,738.10 points.
As for listed oil and gas companies, many began to steeply decline around July-September, losing substantial market value in the process.
Year-to-date, 17 oil and gas companies tracked by KiniBiz had lost an average of 29.1% in market capitalisation since Jan 2 closing prices. Among the worst hit are Perisai Petroleum Teknologi (-69%); TH Heavy Engineering (-62%); Bumi Armada (-57%); and Malaysia Marine and Heavy Engineering or MMHE (-53.5%).
However, value losses are even more substantial if followed from the July onwards, which was when the long drop in oil prices began.
Over the period between July 1 opening bell and Dec 9 closing bell, the 17 companies had collectively lost RM33.7 billion in market capitalisation, representing a 41% drop. The worst hit are Perisai Petroleum Teknologi, which saw its market capitalisation drop from RM1.9 billion on July 1 to RM572.5 million by the close of trading on Dec 9.
Other companies that has lost significant market value over the same five-month period include TH Heavy Engineering, whose market capitalisation regressed 61.8% to RM366.56 million and MMHE, whose market capitalisation dropped 55.6% to RM2.6 billion. Uzma lost 54.1% in market capitalisation to end yesterday at RM443.52 million.
One exception is shipping firm MISC Bhd, whose market capitalisation had risen 25% to RM31.25 billion so far. However, as MISC ships petroleum and liquefied natural gas (LNG), its shipping fees are contractually fixed and therefore dropping oil prices would be a boon.
In any case, the rout in share prices for Bursa Malaysia-listed oil and gas players have seen value emerge, say analysts, as various oil and gas counters got oversold.
Is there opportunity for astute investors to pick up good deals? More importantly, how does investor formulate a strategy for oil and gas picks in the current turbulence?
Tomorrow: Navigating choppy oil and gas investment waters
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