Are O&G companies undervalued?

Most O&G companies have seen their prices battered by the fallout in global oil prices. Every investor has the same curiosity in his or her mind – when is the right time to invest in O&G stocks again…

It is reasonable to believe that significant correlation exists between the shares prices of O&G stocks and global oil prices. We have chosen to perform a quick statistical test on the relationship of ICE Brent Crude Oil against the share prices (since Jan 2014) of three (3) selected Malaysian listed O&G companies, namely Coastal Contracts, Favelle Favco and Sapurakencana Petroleum.

O&G Corr 1

O&G Corr 2

Key observations:

  • Significant relationship is established between crude oil prices and shares prices of these three (3) selected MY O&G companies (with r-squared of 0.74 for Favelle Favco, 0.89 for Coastal and 0.94 for SK Petro). The lower the r-squared, the less precise the formula in forecasting the target price for the counter.
  • Certain formulas can be derived to forecast the target price of these 3 stocks based on crude oil price
  • It appears that Coastal is fairly valued, as the formula forecasts a target price of RM1.63 (based on current crude price of USD31.46/bbl) if compared to its actual share price of RM1.53
  • For Favelle Favco and SK Petro, these two counters appear to be trading higher than its respective target prices as predicted by the derived formulas
  • It is important to understand that this analysis is a simple desktop analysis and requires further fine-tuning. As to when it is the right time to invest in O&G sector, we must first satisfy our self what is the expected floor price for the global oil price, thereafter, to dwell into detailed fundamental analysis about selected counters.

 

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