Amidst the current global financial crisis, arguably the worst since the Great Depression, share indices of all industy sectors have been sent into freefall, only to be held back by intermittent spurts of encouraging news centred around bailing out the subprime crisis through government interventions from around the world. This is especially so for the US government which has just managed to pass its massive US$700b bailout plan after failure in its initial attempt to win over the House of Representatives in Congress.

While the Paulson-led battle to save the US financial system ensues, the spill-over effects of the meltdown are already being felt in the form of a massive global economic slowdown, highly volatile US dollar and once-again-low oil prices. Closer to home, the government has cut GDP growth forecast to 4%-5% because of slowing consumer demand from the US. Inflation has also gone up to a 26-year high of 7.5% in June as a result of commodity prices surging worldwide, causing food import prices to exceed MAS’ expectation.

Falling FTSE ST Indices
Since 3 June 2008, the local FTSE ST Indices, led by Straits Times Index have been mired in a declining trend. The shed-off in value ranges from 16.7% to 60.6%. Over at the SGX public companies-related announcements, there has not been a single industry that is particularly active in either M&A activities or business deals - except for the oil and gas industry which has flourished against the current backdrop of economic downturn.

Positive Announcements
Under the FTSE ST Oil & Gas Index, 3 constituents out of the total 9 constituents have each clinched contracts with respective total value worth more than US$50m (refer to table 1). For instance, Swiber Holdings has attained a total of 3 contracts worth US$275.3m in just over the past 3 months.

In terms of major business activities (refer to table 2), 6 constituents out of the total 9 constituents have either struck business deals overseas, increased their investments in foreign subsidiaries or started new businesses. Chemoil Energy, one of the world’s leading physical suppliers of marine fuel products, has alone invested in a US$5m joint venture in India, and two acquisitions costing a total of US$24.2m in the Philippines.

Many of the above contracts and major business activities are leading indicators of future profits waiting to be reaped by these companies. In fact, since the aftermath of 9/11, crude oil prices have been on the uptrend, climbing from as low as US$22.37 per barrel (according to US Energy Information Administration) to the current correction price of US$87.81 per barrel as of 7 October 2008. Even though the current oil price correction is still on after having reached its peak at US$147.27 per barrel on 11 July this year, it is widely believed that the outlook for the oil and gas sector remains bullish as oil demand will soon recover once the global economy rebounds.

Strong Financial Results
In a review of the latest quarterly financial results (refer to table 3), 7 out of the 9 constituent stocks have recorded strong revenue growth in the range of double to even triple digits. Many of these strong sales in revenue have been spurred by offshore oil exploration and production related activities as well as robust oil prices.

In terms of net profit, 4 out of the total 9 constituent stocks have posted strong positive results, with the highest netting more than 7 folds year-on-year. This is excluding the other three companies, namely CH Offshore, China Aviation Oil and KS Energy Services which have made profits only to be wiped off by sizeable disposal gains in the previous corresponding financial years.

Bull Or Bear?
These recent spates of good company news, when pieced together, certainly paint a rosy picture of the landscape surrounding the thriving oil and gas industry. Under normal circumstances, the FTSE ST Oil & Gas Index should be on an uptrend. However, reality check shows that the FTSE ST Oil & Gas Index is falling despite the positive outlook. This is more so every now and then when oil price recedes. It seems that the overwhelming fears of global recession and credit crunch have taken its toll on the confidence of investors reacting towards signs of good news.

According to a recent research report by Westcomb Securities dated 14 August, oil and gas majors will continue with their exploration and production activities as long as the oil price stays above US$70 per barrel. From the illustration of the above results, it is believed that fundamentals for sustained exploration and production activities remain strong despite the recent adjustment in oil prices. If the above stays true, the FTSE ST Oil & Gas Index should be able to show its strength once the economic tide goes out.