Investment Highlights

• Transitioning on the way. We attended Rystad Energy’s 2020 APAC Virtual Annual Summit yesterday which highlighted the transition of large international oil companies (IOC) towards renewable energy from fossil fuels amid a global demand outlook suppressed by the Covid-19 pandemic. The growth in solar photovoltaic generation is expected to accelerate, growing to 10GW by 2030 from 2GW currently due to declining solar panel costs, despite lower electricity prices for wind power. Additionally, renewable energy may have export potential if hydrogen electrolyzer projects are widely adopted by Europe, notwithstanding the current debate on the environmental impact and cost of hydrogen fuel cells.
  
  Rystad Energy is a Norway-based independent energy research and business intelligence company which provides data analytics and consultancy services to the oil & gas industry.

• Covid-19 structural impact. Rystad projects Covid-19 cases to spike by 5x during the winter season in November– December as herd immunity will not be achieved. As the realistic strategy is wait for a vaccine that could be administered globally in 8–24 months, new technologies and adapted behaviour will continue to have a long-term structural impact on energy usage.

• Watch out for second wave cuts. Global daily oil demand is projected to decline by 18mil barrels in 2020 although global daily road traffic is showing signs of a pick-up in September, supported by China and other parts of Asia returning to near normality. Rystad warned of a second wave scenario which could cut an additional 4mil barrels/day production towards the end of the year.

• Below Covid-19 demand until 2025. The viral pandemic will have a net negative impact on global oil demand until 2025, with an estimated 0.9mil barrels/day below pre-Covid 19 levels, after falling 24mil barrels in April this year.

• US shale production growth to emerge late next year. US shale production, which dropped by 2.7mil barrels/day MoM in April 2020, could continue to decline under a US$40–45/barrel price regime until growth begin to emerge in late 2021. While Opec+ may recover to pre-Covid 19 levels by mid-2022, output from the rest of the oil producing nations, excluding the Middle East and US, is expected to gradually slide in 2020–2025 due to lower field sanctioning in 2020-21.

• Oil price recovery by late 2022. Oil price could recover to a base-case scenario of US$75/barrel in late 2022 from the curtailment of global oil production as demand gradually improve, which could set the next down cycle in 2023–024. However, a more volatile upcycle could mean over-US$90/barrel prices by mid-2022, followed by a more drastic collapse to US$30/barrel in 2024 from potential overinvestments.

• M&A to gather momentum. Recovery in upstream merger & acquisition (M&A) deals is expected after a dearth of activity in 1H2020 with Chevron acquiring Nable Energy for US$13bil in July this year. Corporate action is likely with Exxon Mobil planning to divest assets in the UK, Germany, Australia, Indonesia, Vietnam and Malaysia. Repsol and Petrofac also plan to exit Malaysia.

• Cost pressures may have reached the floor. The offshore service pricing upcycle in 2015–2020 was the shortest since 1990, although the current downturn could be limited to further pressures by offshore drilling prices already reaching the floor currently with employment reductions surpassing 20%. While South Korean fabricators have borne price reductions of up to -8% from January to July 2020, China producers have experienced a more modest -5.5% due to the stricter viral restrictions and subsequent economic recovery. The Middle East, however, has experienced a 20% increase in local fabrication costs since November 2016 due to strong regional demand.

• Big Oil to renewable energy could trigger M&A wave. Shareholder and green agenda activism is increasingly causing Big Oil to transition from fossil fuels with plans to expand renewable energy by 6.4x to 45GW with planned capex of US$200bil by 2030 from 7GW currently. All majors, except for Exxon Mobil for now, have committed to achieve net zero emissions by 2050 with plans to divest their overseas oil & gas investments. This could also trigger an era of mega mergers and consolidation among the super majors.

• Petronas and Yinson have invested in solar. The shift towards renewable energy has already been underway over the past 3 years with Petronas operating 448MW of solar capacity in India and Southeast Asia and presently developing another 212MW. In Malaysia, Petronas is operating and developing 50MW of solar capacity, part of that to supply to 15 Tesco stores. Amongst local service providers, only Yinson has taken the plunge by investing US$30mil for a 95% equity stake in a Rising Son Energy, which has a 160MW solar farm in Bhadla Solar Park Phase II, Rajasthan, India

• Maintain 2020 oil price forecast at US$40–US$45/barrel and 2021 at US$45–50/barrel. YTD, Brent crude oil prices have averaged US$42/barrel with the current spot price also at US$41/barrel from the year-low of US$14/barrel on 22 April 2020. This is supported by US crude oil inventories declining by 8% to 496mil barrels currently from the all-time high of 541mil barrels in June. Hence, we maintain our crude oil price forecast at US$40–US$45/barrel for 2020, in line with Petronas’ nearterm view, and US$45–US$50/barrel for 2021. For comparison, the EIA’s Short-Term Outlook projects crude oil price at US$41/barrel for 2020 and US$50/barrel for 2021.

• Maintain OVERWEIGHT call with 5 BUY calls vs only 2 SELLs and 1 HOLD. Despite the ongoing volatility of crude oil prices, the down cycle may have reached a bottom with the worst experienced in April this year when Brent spot prices fell to a low of US$14/barrel while futures inverted to an abnormal negative price due to lack of storage capacity. We recommend Petronas Gas, as the group’s optimal capital structure strategy and resilient earnings base translates to highly compelling dividend yields.
  
  We also like Dialog Group and Serba Dinamik Holdings due to their resilient non-cyclical tank terminal and maintenancebased operations while Petronas Chemicals Group has a high correlation to the recent oil price upturn. Even though Bumi Armada is still likely to experience asset impairments towards the end of the year, the company has shown stabilising profitability from improved operating performance of its floating production, storage and offloading vessel, Armada Kraken together with a stronger balance sheet.

Source: AmInvest Research - 18 Sept 2020