Malaysia’s Oil & Gas (Neutral)–False Signal Or Recovery?

  • OPEC U-turn. In contrast to its previous stance of protecting market share by pumping more, OPEC has indicated in a recent meeting in Algeria that it could cut its oil output by 240,000-700,000/day to stabilize the oil market. Exact details on the production cut would be clarified in the upcoming meeting in Vienna on 30 Nov whereby cuts in each member countries would be decided. We believe our range forecast for Brent of between USD50- 60/bbl would still be valid given USD60/bbl would be the estimated breakeven for US shale oil.
  • Cut could be self-defeating. While any output cut is positive for market sentiment, the proposed cut could be undermined by 3 main issues: (i) 3 major countries are exempted from the cut namely Iran, Nigeria & Libya of which the output increases could offset the proposed cut, (ii) OPEC oil production is still at 8-year high at this juncture and a cut of that magnitude might not be sufficient, and (iii) with oil prices rallying, US shale producers could easily ramp up their production within 6 months due to their short oil investment cycle.
  • Impact to O&G players. We believe the abovementioned news would not be sufficient to improve local O&G services playersearnings as the anticipated oil prices improvement is not expected to lift oil producers’ CAPEX significantly at least in the medium term. The only company which would be directly impacted by oil price movement in our coverage universe would be SKPETRO. According to our sensitivity analysis, an incremental USD10/bbl improvement in Brent oil prices would bring about 42% increase in our current earnings forecast.
  • Valuation impact? For asset based players which are valued using PBV method, every 0.1x increase in target multiple would bring 15-30% improvement in our fair values for local O&G companies. As for PER-driven companies, every 1x increase would improve our target prices for companies by 10-15%.
  • OPEC cut will not rerate valuation. We do not believe that the current development would bring about a rerating to the overall industry as CAPEX spending is not expected to improve significantly while upstream industry still has to face asset oversupply overhang in the time being. Our house still maintains the view that recovery for the industry would be slow next year with activities expected to pick up but not sufficient to change the current fundamentals of the O&G industry.
  • Weaker than expected oil production growth.
  • Further slump in oil prices.
  • Significant supply overhang in jack up rig market
  • Positives – Lower CAPEX from oil producers reining in oil production.
  • Negatives – Persistent oversupply in the market.
Source: Hong Leong Investment Bank Research – 17/10/16