KUALA LUMPUR (Aug 12): Resilient demand for natural gas proves to be a bright spot amid a lower oil price environment that is weighing on producers and services firms, said MBSB Research.

Liquefied natural gas, or LNG, is benefiting from long-term demand for cleaner fuel and as rising transition fuel which will increase utilisation of carriers and storage owners, the research house wrote in an oil and gas sector note on Tuesday.

The Malaysian oil and gas sector is “currently in a state of equilibrium” and investors are “highly likely to be selective” over the near term in an environment of steady earnings and valuations, the house said.

Crude oil prices in July declined 17% year-on-year and 0.4% month-on-month, averaging US$69.55 (RM294.44) per barrel, due to higher supply, slow demand growth, and inventory built up.

Prices of natural gas, meanwhile, surged 49% year-on-year thanks to increase in demand for power generation following the summer season, rising exports that outpaced production, and storage deficits in some producing countries.

However, natural gas prices were down by nearly 10% month-on-month to average US$3.31 per million British thermal units, from higher global inventory that provided a buffer against the price spikes, higher production volume, and uncertainty in weather forecasts amid the season transition.

For most Malaysian oil and gas companies, particularly those involved in upstream as well as services and equipment, revenue and earnings in the second quarter will likely be weaker on a year-on-year basis, MBSB Research said.

“Storage and pipelines, however, are likely to be a relative bright spot,” the house noted. “The global demand for storage, driven by inventory builds and the stable nature of pipeline contracts should provide a buffer. “

For strategy, MBSB Research maintained its ‘neutral’ stance on the sector, with MISC Bhd (KL:MISC) as its top pick for its fleet of LNG carriers and long-term contracts that shield it from short-term market swings.

“This combination of stable cash flows, exposure to growth sectors, and a defensive posture against short-term market fluctuations makes it a compelling company to look into, amid the uncertainties and headwinds plaguing the sector,” MBSB Research said.