Sep 17, 2015

Publicinvest: Overweight On Oil & Gas

Various events such as the Greek debt crisis and the recent devaluation of the Yuan dampened the prospects of a sooner-than-expected recovery, with further uncertainties from the much-awaited Federal Reserve interest rate hike that could either quicken or delay the upward push on crude oil prices. For some relief, OPEC’s monthly oil report predicted higher demand of c.30.3mbbls/day (+190,000bbls/day MoM) for crude oil next year, supporting the view that the pressure on declining oil prices would control the US shale boom and cut global surplus. China and Latin America, both previously oil demand growth drivers, have been said to contribute slower growth next year owing to overall weaker economic outlooks. The EIA also recently published some definitive data showing a slowdown in US oil production to 9.13mbbls/day, down 500,000bbls/day since April’s peak. This reduction is significant and accelerating, equivalent to entire outputs of countries such as OPEC members Ecuador and Libya’s current production level.

To recap, we had touched on our view of the W-shaped course in March - crash, recover, crash, recover trend, whereby we are at the bottom part of the “W”. This drop could be relatively dragged out longer than expected considering a chain of events snowballing to this point but would eventually rebound on the back of expectations such as the International Energy Agency’s view that non-OPEC production would fall by 500,000bbls/day in 2016 from the closing down of high-cost production facilities in Eagle Ford in Texas, Russia and the North Sea.

We retain our Overweight view for the sector, premised on our view that oil price stability seems to be in sight, assuming that supply overhang issues will eventually be erased with rising global demand and shrinking US output estimates. The Iraqi government has furthermore sent an official letter warning oil companies on expected lower reimbursement levels from fall in oil-sales revenues thus would sharply reduce funds available to the Ministry of Oil. This is on the back of Iraq having successfully increased production gains of more than 4mbbls/day. Issues of oil companies unable to operate in Iraq securely and depend on consistent payments from the government could hinder the country’s long-term ability to continue increasing its oil output, hence another oil supply curbed? Our domestic O&G market is moreover stimulated by PETRONAS in anticipation of more upcoming contracts that was delayed since 2H14. Contract types in the pipeline to include engineering, procurement, construction, installation and commissioning (EPCIC), fabrication, maintenance services and various jobs for the Refinery and Petrochemical Integrated Development (RAPID).

  • US. Dollar appreciation in recent days has made commodities more expensive for other currency holders, placing further stress on an oil price rebound. In the US, indebted companies are increasing as traditional lending and equity markets are less willing to fund marginal companies. As a last resort, these companies are turning to private equity investors who are also on the lookout for these desperately vulnerable companies, but most often at steeper interest rates and demanding terms for the operator.
  • China. Devaluation of the Yuan shook the world, even as its stock exchange fell, reinforcing concerns over its economic health. Some red flags have been raised with high levels of provincial debt, an inflated stock market and environmental pollution that could force the government to loosen its reins on its two decades of phenomenal growth. Currently the world’s largest energy consumer, China’s fragile condition, coupled with evidence of a growing crude glut build-up could serve as a dampener to oil prices this particular cycle however. Countries that depend heavily on exports to China especially Latin American countries also saw their currencies sliding.

by PublicInvest Research - 17 Sep 2015