KUALA LUMPUR: Brent crude, the global benchmark for unrefined petroleum, has risen above the pre-pandemic level of more than US$70/barrel from a low of around US$15/barrel in mid-March 2020.
The Organisation of Petroleum Countries (OPEC) and countries acting in concert, notably Russia-led OPEC+, had done a reasonably disciplined job in controlling production and supply to sustain prices amid increased demand as economies emerge from strict lockdowns, analysts said.
The Malaysian oil and gas (O&G) industry itself has seen notable changes over the past two years.
National oil corporation Petronas has had to relinquish some control and profits of the sector to oil producing states notably Sarawak.
Additionally foreign oil majors and producers such as Shell and Talisman have gradually exited Malaysia, while smaller, independent operators such as Hibiscus Petroleum Bhd and Jadestone Energy Sdn Bhd have acquired both producing and exploration blocks.
In its recent research note, Kenanga Research opined that upstream activity would pick up and eventually normalise back to pre-pandemic levels by 2023.
The firm also thinks that O&G services players would need to "increase competencies to compete overseas, and/or expand their services into other sectors of energy in order to future-proof their portfolio."
However, O&G services players are currently valued at relatively low price-to-earnings ratios (PERs).
Understandably, this is a reflection of the uneven recovery as lockdowns and re-openings alternate in many countries – depending on the severity of Covid-19 cases and vaccination rates – and the uncertainty of air travel, a major demand driver for petroleum products.
Nonetheless, many countries are starting to accept the reality of living with Covid-19 with the realisation that extended lockdowns are unsustainable and intolerable to the economy.
Eventually as pointed out by Kenanga Research, the picture would start to normalise with the O&G services sector ripe for a re-rating.
Stripping its embroilment in the auditing dispute with its former external auditor KPMG PLT which has cast dark clouds at its corporate front, Serba Dinamik Holdings Bhd fits the bill as an all-rounder O&G service provider.
This is evident by the securing of 15 new contracts with 10 operation and maintenance (O&M) projects in Malaysia and Indonesia, and five engineering, procurement, construction and commissioning (EPCC) contracts in Malaysia and Nepal.
The contract awards, according to Public Investment Bank Bhd (PublicInvest) on August 12, is valued at RM386.3 million and would improve Serba Dinamik's earnings visibility to a healthy order book of RM18 billion.
For comparison, Dayang Enterprise Holdings Bhd and Wah Seong Corp Bhd, Serba Dinamik's nearest peers in the O&M space, are both trading at PER 2022 of about eight times, while well services providers like Deleum Bhd (Deleum), Uzma Bhd and Reservoir Link Energy Bhd at PER 2022 of six to eight times.
Larger market cap players such as Dialog Group Bhd and Yinson Holdings Bhd are at PER 2022 of 22.8 times and 12.3 times respectively, but even that is at the lower end of their historical PERs.
Interestingly, Serba Dinamik is "at the bottom of the food chain" with a PER 2022 of only two times.
Granted, the company is affected by a slew of unfavourable publicity due to the controversy surrounding the company's former auditor.
However, the issues are being resolved with an independent reviewer in place and a new auditor appointed.
While it is understandable that most analysts are still bearish with Serba Dinamik's near-term outlook – hence their "sell" rating – the tide has begun to shift with KAF Research and PublicInvest retaining their "hold/neutral" calls at 38 sen and 44 sen respectively.
At Serba Dinamik's end, obviously a comprehensive – and favourable – resolution to its auditing-related issues will be a re-rating catalyst given the company may outperform its peers within a sector that is already seeing across-the-board undemanding valuations.
At industry-wide level, the long-suffering O&G services subsector, too, is set for a re-rating as capex and activities pick up from 2022 onwards.
The pickings are there for the astute and steadfast investor to profit from the currently under-appreciated situation.