Oil and gas sector
Maintain neutral: Our house view projects 2016 oil price to average around our “best case” of US$40 (RM164) to US$45 per barrel for West Texas Intermediate (WTI) and Brent from “base case” of US$30 to US$35 per barrel, based on econometric models. With the WTI averaging US$37 per barrel since the beginning of the year, we expect intraday oil prices to hover around US$53 to US$58 per barrel in the second half of 2016.
Our “base case” average oil price for 2017 is US$45 to US$50 per barrel and “best case” at US$50 to US$55 per barrel. Supply disruptions from capital expenditure (capex) reduction led to output decreasing by around 3.75 million barrels per day (mbpd) to 3.8mbpd and stopped the 77% drop in oil prices between 2014 and 2016. Besides, speculators are taking a more bullish bet on the oil price.
But we expect upside to be limited due to a potential rate hike by the US Fed, which translates into a stronger US dollar and higher production going forward, spurred by an improved price environment. To date, the order inflows to Malaysian oil and gas (O&G) players have risen by 67% quarter-on-quarter (q-o-q) to RM1.9 billion, largely from rig charter extensions and new maintenance orders for SapuraKencana Petroleum Bhd. We expect these order flows to improve as activities remain unabated on the refinery and petrochemical integrated development (Rapid) and ongoing upstream field development works.
While Petroliam Nasional Bhd’s (Petronas) recent results showed that first quarter of 2016 capex dropped 25% q-o-q to RM11.3 billion due to cutbacks in upstream developments, these expenses went into the Rapid and overseas upstream projects in Canada and Azerbaijan.
Crude oil prices have since rebounded to US$48 per barrel on concerns of supply disruptions arising from Canadian wild fires. However, potential hedging activities and the recent weekly rise in US inventories by 1.3 million barrels could indicate that the current trajectory may not be sustainable.
As Petronas maintains its crude oil price outlook at US$30 per barrel for 2016 and US$40 per barrel for 2017, we do not expect any significant change in the group’s strategic direction towards the rationalisation of upstream exploration and development expenditures. While upstream developments face significant cutbacks, we expect downstream activities, which benefit from low crude oil prices, to be less affected. Hence, we expect other projects, which are already at the development stage, such as the US$27 billion Rapid project, US$1.5 billion Sabah ammonia urea or Samur in Sipitang and the US$2 billion Malaysia liquefied natural gas Train 9 in Bintulu, Sarawak, to proceed without delays.
Beneficiaries of these downstream roll-outs are largely foreign engineering groups, but locals such as Malaysia Marine & Heavy Engineering Holdings Bhd, KNM Group Bhd and Dialog Group Bhd may be involved as subcontractors. Our “neutral” call on the sector is maintained as prospects for a sustainable turnaround in crude oil prices are opaque at this stage with the re-entry of Iranian oil into world markets, and a potential resurgence of shale oil output if crude prices remain above the US$40 per barrel threshold for a sustained period. We prefer companies with stable and recurring earnings such as Dialog and Yinson Holdings Bhd. Our “hold” calls are for Petronas Gas Bhd, MISC Bhd and UMW Oil & Gas Corp Bhd, while Bumi Armada Bhd remains a “sell”. — AmInvestment Bank Bhd, May 20
http://www.theedgemarkets.com/my/article/limited-upside-seen-og-sector-potential-us-rate-hike
