Oil price surge leaves Asian energy sector gasping

Oil price surge leaves Asian energy sector gasping

By Nick Edwards

HONG KONG (Reuters): Oil prices may be nudging nine-year
highs, but Asian energy sector assets have lagged the rally,
ignored by investors who are focused instead on the risks soaring
crude costs pose to the gradually recovering region.

As a net importer of oil with a predominance of crude-
consuming refining as opposed to producing firms, Asia's
corporate earnings and its macro-economic performance could be
hit by higher crude prices, analysts say.

Investors are also wary of the impact higher oil prices may
have on U.S. interest rates and the implications any hikes would
have on Asia's ability to raise funds on the international
capital markets for much needed corporate restructuring.

Higher U.S. interest rates would also hurt regional stock
markets, further dampening sentiment.

"We have certainly not seen any meaningful reallocation of
funds into oil sector equities as a result of the oil price
spike," James Brown, Asia-Pacific oil and gas analyst at Merrill
Lynch, told Reuters.

"Of listed entities in the region, excluding Australia, the
overwhelming majority are refining and marketing companies. For
them, higher crude oil prices are a negative," Brown said.

Crude prices have rocketed about 30 percent so far this year
and still hover within sight of March's nine-year high of
US$34.37 per barrel at around $32.50 in late Asian trade on
Friday. July NYMEX ended at $32.35 a barrel in Friday's New York
trade.

With the latest rally fueled by heavy U.S. gasoline demand and
the still bustling global economy, prices have stampeded to
levels that may force the Organization of Petroleum Exporting
Countries (OPEC) to boost supplies and dampen prices.

Asian energy sector shares have performed woefully against
this backdrop, even when you pull in the region's only two listed
pure exploration and production companies.

Gulf Indonesia stock has gained about 10 percent so far this
year, but is still about five percent below its brief mid-January
high.

Thailand's PTT Exploration and Production Plc (PTTEP) is 26
percent down from its January 18 high.

Merrill Lynch's Brown said both stocks were victims of the
preoccupation with Asia's New Economy technology, media and
telecoms (TMT) investment opportunities.

By Singapore-based Brown's calculations PTTEP, which closed at
193 baht ($4.93) on Friday, is trading at around a 45 percent
discount to its net asset value (NAV) of 354 baht.

Gulf Indonesia is trading at a 17 percent discount to NAV.

"The oil sector is very much an Old Economy sector and there
has been a serious malaise on the part of institutional investors
in their attitude towards the oil and gas sector," he said.

It was so entrenched, Brown says, that investors ignore the
fundamentals of oil prices near to post-Gulf War highs, with a
solid outlook and the prospect of trading in a historically high
range of $22-28 per barrel for some time.

Asian energy shares instead trade at an implied crude price of
about $14-18 per barrel.

Refining companies fare no better.

South Korea's largest refiner, SK Corp for example, has seen
its stock sink 42 percent so far this year, underperforming the
Korea Stock Exchange Chemical Company sectoral index -- down 33.4
percent -- and the benchmark KOSPI, down 26.2 percent on the
year.

Only one firm, Hong Kong and New York-listed Chinese oil major
PetroChina, is bucking the trend.

PetroChina, an integrated oil firm, has seen its Hong Kong
shares race up to HK$1.76 (22 U.S. cents) a share from a low of
$1.10 it hit within two weeks of its disappointing April 7
trading debut.

That 60 percent-rally has largely coincided with the run-up in
crude prices, but analysts say other factors like the U.S.-China
trade pact have also been important kickers.

Nevertheless, it is impressive as regional markets have fallen
over the same period as investors reallocated assets.

But, according to Dresdner Kleinwort Benson's Asian equity
strategist, Sean Darby: "There is no evidence that fund managers
have been diverting equity profits into oil."

Darby thinks soaring oil costs indicate that the U.S. Federal
Reserve's efforts to slow the U.S. economy are having minimal
effect, as global economic growth roars on.

"Oil was one of the asset classes I felt was indicating we
were going to have a problem at this moment in time and it is
still at the forefront of what ought to be people's attention to
further interest rate rises," Darby said.

This could prove a double whammy for investors who have lately
warmed to the view that the Fed is near the end of its rate
tightening cycle.

If rising oil prices throw these calculations out, a further
reversal will be seen with inevitable consequences for Asian
stock markets and a raft of other problems for corporations
trying to raise funds on international markets to restructure.

"If you see ugly numbers up ahead, the market is going to have
to make a reversal and start pricing interest rates higher. Asia
is obviously going to get hit," said Craig Chan, regional
economist at ING Barings in Hong Kong.

For oil importers like South Korea and Taiwan, that could lead
to inflation pressures.

Meanwhile, raising funds through international debt issues
would become prohibitively expensive.

Asian dollar bond issues have already stagnated this year,
falling below 1999's issue level in the first quarter, as U.S.
interest and swap rates have blown spreads to U.S. Treasuries on
even the best credits out of issuers' price ranges.

Even in countries like Indonesia, one of Asia's crude oil
exporters along with Malaysia, higher prices might help close a
yawning budget deficit, but not enough to get investors spending.

"Investors won't be focusing on the increased revenue for the
government, but the reform and restructuring work," Chan said.
"Without reform investors won't put a lot of money in Indonesia."