• Ongoing Covid-19 impact. We attended Rystad Energy’s Covid-19 April Update and Market Outlook recently, which was presented by its founder and CEO Jarand Rystad and head of analysis Per Magnus Nysveen. In a review of its earlier expectations last year, Rystad believes that herd immunity will not be achieved except in some countries in Latin America by this year given the movement restrictions being implemented globally.

Thus far only East Asia, i.e. China, has largely suppressed the virus while multiple waves of the virus continue to plague the US, EU and Latin America. Additionally, populist governments such as Brazil which have not strictly enforced movement restrictions have registered higher death rates while their economies have not fared any better.

Domestic activity in OECD countries will likely reach near 100% in 2H2021 even though international travel will not fully normalise until vaccination has been fully deployed, likely by 2023. As such, new technologies and behaviour will structurally change energy consumption as exemplified by the decline of business travel.

• Covid-19 infection rate at 11% of global population to date. Rystad’s model indicates that the Covid-19 infections have actually reached 810mil people, translating to 10.5% of the global population (Exhibits 2–4). As the majority of cases are not detected, this is derived from the reported fatalities of 3mil together with above-normal death rates of 800K. The highest growth in fatalities is in Brazil, Turkey, India and Argentina while the US and UK have registered sharp declines due to higher detections and vaccinations.

As at December 2020, North America was able to detect 35% of cases, Europe 40%, Asia 30%, South America 15% and Africa below 10%. Hence, Rystad estimates that the population of South America currently has the highest rate of infection at 32%, followed by North America 25%, Europe 13% and Asia/Africa 3%.

• Most developed countries will reach 50% vaccination by the end of 2021 with North America and western Europe achieving this level earlier by July 2021. North America and western Europe will reach a 75% vaccination level by September 2021, South America by January 2022, South Asia by February 2022, Southeast Asia by March 2022 and the Middle East by May 2022.

• Global oil demand will not return to pre-pandemic levels until 2022. Following the sharp drop in global oil demand by 20mil barrels/day (bpd) in April last year, the gap has narrowed to 5.7mil bpd in March 2021 (Exhibit 7). Based on a monthly incremental demand of 430K, Rystad expects a December 2021 shortfall of 1.8mil bpd vs. pre-pandemic 2019 level, leading to 95.4mil bpd (+6.5% YoY) for 2021. The fastest recovery is expected from East Asia while the rest of the world will struggle with slower growth rates.

In China, oil demand for road fuel and flight activity has almost rebounded to 2019 levels as domestic travel has increased by 30% while international flights are still down by 60%. In the US, road traffic and flight activities have shown improvement while European aviation is still 60% below 2019 levels.

• Flat E&P this year. Global exploration and production (E&P) investment is expected to be flat this year, followed by a 10% increase in 2022, driven by US shale/tight oil, Middle Eastern onshore projects and offshore deepwater developments in Brazil. With improved crude oil prices, E&P companies are expected to register an increase of 56% YoY in operating cash flows to US$580bil this year. At US$60/barrel, free cash flows for public E&P players could double to US$330bil in 2021 from US$140bil last year. However, Rystad expects companies to reward shareholders instead of ramping up capex investments. Hence, investment ratio is projected to reach only 42% this year vs. 65% in 2020, which experienced a sharp drop in prices and demand.

• Sharp increase in oil field service contracts. Following the harsh winter season in February this year, US shale operators are rushing to catch up with their original plans with 1Q2021 Permian fracking activities increasing by 20% QoQ together with higher rig counts. While Rystad expects substantial increase in US production, this is unlikely to surge to pre-Covid 19 levels over the medium term given shareholders’ expectations for higher dividend yields.

Even so, Rystad notes that the values of major oil field service contracts surged 3x QoQ to US$43bil in 1Q2021 driven by engineering, procurement, construction and installation jobs as well as maintenance & operations (Exhibit 12).

• Surge in Co2 prices speeds up energy transition process. Carbon dioxide (Co2) prices on the European Emission Trading System has surged by 90% to over US$50/tonne since November last year, which is expected to accelerate the transition from coal-fired power plants to gas. However, Australian coal prices has still doubled to US$90/tonne from May last year from the partial recovery from Covid-19 and high shipping charges.

• Improving domestic order flows. Notwithstanding Rystad’s flattish E&P capex expectations this year, 1Q2021 order flows in Malaysia have improved QoQ with listed companies announcing contracts valued at RM3.3bil, a 2.2x increase from RM1.5bil in 4Q2020 (Exhibit 15). YoY, this represents an even more rapid surge of 5.6x from only RM569mil in 1Q2020, which was drastically derailed by the onset of Covid-19 pandemic together with the short-lived Saudi-Russia oil war.

• Maintain OVERWEIGHT call with 8 BUY calls vs. only 1 HOLD. 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 continue to like Dialog Group and Serba Dinamik Holdings due to their resilient non-cyclical tank terminal and maintenance-based operations. Our other BUY calls are Sapura Energy, which has just completed its RM10bil debt restructuring package and repositioned the formidable EPCIC group to secure fresh global orders; and Petronas Gas, which offers highly compelling dividend yields from its optimal capital structure strategy and resilient earnings base.

Source: AmInvest Research - 16 Apr 2021