The EIA’s Short-Term Energy Outlook has regularly revised its 2019 Brent oil projection from US$61/barrel to US$70/barrel over the past 6 months, currently settling at US$67/barrel. This is also its 2020 Brent oil price projection which has remained constant for the past 1 month, following a revision from US$62/barrel earlier this year.
The changes stem from high market volatility given multiple demand-supply dynamics amid geopolitical strife in the Middle East and Venezuela while global demand expectations may be impacted by the persistent on-off trade tensions between the US and China, and potentially Europe.
We note that while Bumi Armada has successfully refinanced its unpaid US$380mil debt, the possibility remains that the group may still need to undertake a highly dilutive equity-raising exercise amid a depressed share price given that it has secured a 30% equity stake in an India-based FPSO which could cost over US$1bil.
Based on Petronas’ estimates, jack-up rig usage had been revised upwards to 16–18 this year from 7–10 forecasted by the group in its 2018–2020 outlook in the previous year. Likewise, Petronas’ 2019 projection for offshore installations has been raised to 8–9 from 6–7. We note that 2018 capital expenditure rose 5% YoY to RM46.8bil, driven by a 2.8x surge in spending for international projects despite a 32% contraction for Malaysia as the Refinery and Petrochemical Integrated Development (RAPID) in Johor has reached almost full completion.
Nevertheless, offshore projects in Brazil, Mexico, the Middle East and West Africa may be still poised to gain traction with Sapura and MMHE being selected for Saudi Aramco’s Long Term Agreement programme, which allows them to bid for the kingdom’s massive offshore projects that could reach US$150bil over the next 10 years. Westwood Global Energy Group is projecting global drilling and well services expenditure to grow 19% to US$1.9tril for 2019-2023 from 2014-2018.
Our top picks are still companies with stable and recurring earnings such as Serba Dinamik and Dialog Group. We like the recurring income business model of Dialog and Serba Dinamik, which are involved in operation and maintenance services while Dialog’s earnings visibility is further secured by the Pengerang Deepwater Terminal project with its enlarged buffer zone.
However, we may downgrade to UNDERWEIGHT due to: 1) higher-than-expected shale production and earlier-than-projected transportation bottleneck alleviation; 2) slower-than-expected global economic growth against the backdrop of worsening trade tensions; 3) accelerated adoption of fuel-efficient-cum-electric vehicles that could reduce consumption and lead to “peak oil demand”; 4) non-compliance by Opec members to their agreed quotas, which will again lead to aggressive measures to regain market shares; and 5) increasing exit from oil and gas stocks by ESG-compliant global funds.
Source: AmInvest Research - 5 Jul 2019
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