By Myra P. Saefong
Oil and natural-gas shares rallied Monday afternoon in Asia, and
the gains looked ready to stick as the recent climb in crude-oil
prices past $82 a barrel helped highlight the sector's
potential.
Energy shares, particularly those in China and Japan, may
benefit in the longer term from changes to energy pricing policies,
as well as from an expected rise in exploration spending and
forecasts for further strength in oil prices, analysts said.
Oil prices are likely to fluctuate between $70 and $90 during
most of 2010, averaging $80 per barrel versus $62 in 2009,
"ensuring the resumption of earnings growth" in the Chinese
oil-and-gas sector, analysts at Mirae Asset said in a recent note
to clients.
Crude-oil futures for April delivery finished Friday at $81.50 a
barrel in New York, scoring a gain of more than 2% for the week
following better-than-expected U.S. jobs data and positive comments
from Chinese officials about economic growth.
April crude tapped a high of $82.12 briefly on Friday, the
highest intraday level for a most-active futures contract since
Jan. 11, according to FactSet Research. Prices extended their gains
to trade as high as $82.08 on Globex by Monday afternoon in
Asia.
Energy shares in Asia moved broadly higher on the gains. In Hong
Kong, shares of Cnooc Ltd. advanced 2.4%, China Petroleum &
Chemical Corp. (SNP) rose 1.8% and China Oilfield Services Ltd.
(CHOLY) tacked on 4.5%.
Shares of PetroChina Co. (PTR) were 2.9% higher on news that the
company, China's largest-listed oil company by capacity, and Royal
Dutch Shell PLC (RDSA) are offering to pay about 3.26 billion
Australian dollars ($2.97 billion) for Australian energy producer
Arrow Energy Ltd.
In Tokyo, Inpex Corp. was up 0.9%, Nippon Oil Corp. (5001.TO)
rose 1.3% and Japan Petroleum Exploration Co. (1662.TO), also known
as Japex, added 1.5%. In Sydney, Santos Ltd. (SSLTY) added 3.7%,
and Oil Search Ltd. (OSH.AU) rallied 6.1%.
Advances in the oil shares coincided with broader regional
gains, with the Nikkei 225 Average trading 1.7% higher Monday
afternoon in Tokyo, Hong Kong's Hang Seng Index up 2%, South
Korea's Kospi up 1.2% and the S&P/ASX 200 gaining 0.9% in
Sydney.
Betting on oil's value
Analysts were upbeat on the outlook for Asia's energy market,
given forecasts for higher oil prices.
"Crude-oil futures should continue to provide support to oil
shares," said Darin Newsom, a senior analyst at Telvent DTN.
Crude prices may want to challenge the January high of $83.95,
with support coming from the investment side of the market, he
said.
"If the spot-month crude contract takes out the January high,
the seasonal index would indicate an extended rally to near $96
through this summer," Newsom said.
However, "the underlying supply and demand [situation] doesn't
seem to support such a rally," he said.
Still, analysts at Yuanta Research have a "stable" outlook for
prices for 2010 to 2011.
"We believe oil prices will inch upwards and are unlikely to
experience severe fluctuations over the next two years," they said
in a note to clients on the petrochemical sector.
They attributed their price forecast to improving but restrained
demand, production controls by the Organization of the Petroleum
Exporting Countries that limit the oil-price downside, and
increasing output from Iraq.
"The sustained rebound of both oil and gas prices will improve
the oil companies' cash flow and investment confidence," Mirae
Asset analysts said in a research note on China's oil and gas
market.
Given that, they expect "increased spending on exploration,
development and production, which should all lead to earnings
surprises for our industry top-pick, China Oilfield Services," they
said, adding that the company will continue to leverage on its
dominance in offshore China.
Pricing power
Analysts also said changes to pricing policies may provide
support for the market in China and Japan.
Japan's Japex in January introduced a pricing formula that would
offer a "new opportunity to capture margins," Polina Diyachkina, an
analyst at Macquarie, said in a note to clients.
The pricing formula would incorporate fluctuating liquid natural
gas prices to 17 of 23 customers who are domestic gas companies,
she said.
"A new domestic gas pricing formula will not perform magic, but
should allow the company to pass on higher imported LNG costs,
while previously that could have been a constraining factor," she
said.
Diyachkina views Japex as a "hidden value play," while Inpex
remains Macquarie's top pick in Japan's oil-and-gas sector.
Meanwhile, "the China oil/gas sector could benefit from
potential positive energy-pricing policy shifts this year,
including implementation of domestic natural-gas pricing reform and
fine-tuning of the refined product fuel pricing scheme," Mirae
Asset analysts said.
After the March National People's Congress, "China could hike
domestic natural-gas prices and implement tax subsidies to expedite
upstream project development for meeting strong downstream demand
growth," they said.
"Firms with large gas reserves, particularly those with access
to pipelines and city gas plays, could be potential winners," Mirae
Asset said.
So "take advantage of disappointing 2009 earnings headlines (due
in late March) and kneejerk share-price weakness to accumulate
PetroChina," they said.