Investment Highlight5

• Oil price surges to US$67/barrel. Brent crude oil prices surged by US$3/barrel to almost US$67/barrel yesterday following Opec+ decision to largely maintain production levels in April this year given the fragile demand recovery from the Covid-19 pandemic. This was the highest Brent oil price for over a year since 30 December 2019 when the Saudi-Russia price war in March 2020 and subsequent Covid-19 pandemic caused a sharp demand drop in the following month.

• Surprised by Saudi decision. While Russia was allowed to raise output by 130,000 barrels/day and Kazakhstan by 20,000 barrels/day in April this year, Saudi Arabia surprised the market by extending its voluntary production cut of 1mil barrels/day which has been in effect since February this year. With an aim to see lower inventory levels, Saudi Arabia will make the decision in the coming months on the timing to gradually phase out its cut. This comes after Saudi Aramco’s CEO Amri Nasser said that crude oil demand is expected to improve within a few months with most of the growth from China, East Asia and India, while projecting 2022 global demand to increase by 5% YoY to 99mil barrels/day.

• Raise 2021 crude oil price expectation by US$5/barrel to US$55–60/barrel. Given the rise in crude oil price currently, we have raised our crude oil price forecast to US$55–US$60/barrel for 2021 from US$50–US$55/barrel vs an average of US$59/barrel since the beginning of this year. For 2022, we maintain our projection at US$55–US$60/barrel given the possibility of a sharp resurgence in US shale production at the current favourable prices following an unusually cold US weather over the past month together with the removal of all Opec+ production quotas.

Our view is also supported by the 11% drop in US crude inventories to 484mil barrels currently from the all-time high of 541mil barrels in June last year. For comparison, the EIA’s Short-Term Energy Outlook currently projects Brent oil price at US$53/barrel for 2021 and US$55/barrel for 2022.

• Direct boost for E&P players. Among the stocks in our coverage, the immediate beneficiaries of higher crude oil price are those with direct exposure to exploration and production (E&P) activities such as Hibiscus Petroleum and Sapura Energy. Based on 2021 oil price forecast at our higher range of US$60/barrel, we estimate that raise Hibiscus Petroleum’s EPS could increase by 72% for FY22F and 66% for FY23F. Consequently, this could raise Hibiscus Petroleum’s fair value (FV) to RM0.95/share from RM0.79/share currently. For now, we maintain Hibiscus’ forecasts and valuations based on the lower range of our 2021–2022 crude oil forecast of US$55/barrel given the inherent price volatility amid a potential surge in US shale output over the coming months.

For Sapura Energy, the positive boost to the mostly gas-based upstream operation of the group’s 50%-owned Sapura-OMV from a higher average crude oil price of US$60/barrel could reduce its FY22F loss of RM101mil by 30%. For the other O&G players who are largely service providers, the higher price regime could translate to increased confidence to roll out engineering, procurement, construction and installation projects. We expect Malaysia Marine & Heavy Engineering Holdings and Sapura Energy to be the main beneficiaries for a re-energised order book cycle towards the second half of this year.

We also expect an increase in rig and vessel requirements which could improve charter rates and utilisation levels for Velesto Energy and Icon Offshore. FPSO players such as Yinson Holdings and Bumi Armada will continue enjoy the windfall from multiple projects which have reached final investment decisions in Latin America and Africa amid a limited list of operators who are still financially sound after the past cyclical downturns. Players in operation and maintenance such as Dialog Group and Serba Dinamik could also expect improving orders over the longer term with the completion of major fabrication works.

• Maintain OVERWEIGHT call with 8 BUY calls vs. only 1 HOLD. We continue to like Dialog Group and Serba Dinamik Holdings due to their resilient non-cyclical tank terminal and maintenance-based operations. We recommend Yinson for its strong earnings growth momentum from the full-year contributions of FPSO vessels Helang, off Sarawak, Abigail-Joseph in Nigeria and Anna Nery in Brazil together with multiple charter opportunities in Brazil and Africa.

We also like Sapura Energy, which will complete its RM10bil debt restructuring package soon and position the formidable EPCIC group to secure fresh global orders. Meanwhile, Petronas Gas offers highly compelling dividend yields from its optimal capital structure strategy and resilient earnings base.

Source: AmInvest Research - 5 Mar 2021