Investment Highlight5

• IEA suggested no new investments… The urgency of carbon emissions reduction and the path forward for oil companies in line with energy transition policies were highlighted by the IEA’s surprising report in May this year that suggested that no new investment in oil and gas would be needed if the world is to reach net-zero emissions by 2050. Additionally, environmentalists, activist shareholders and European courts have intensified pressure on large multinational oil companies to align their businesses with that net-zero scenario as some of these international majors acknowledged their role in the energy transition.

• … yet need to raise production. In a remarkably swift change in projections, IEA executive director Fatih Birol said earlier this month that unless Opec+ increases production in addition to existing plans to restore 2 million barrels per day (bpd) by July, oil prices will be heading higher as the supply-demand gap will widen with oil demand recovering faster than previously expected. According to Birol, global oil demand could return to the pre-crisis levels of 2019 within a year from strong demand in the United States, Europe and China.

• Aiming for tremendous drop in supply? If there was no further oil & gas investment, Rystad Energy projects that Southeast Asia’s natural gas will naturally decline by a substantive 60% to 7.5bil cu feet/day by 2030 from 19bil cu feet/day in 2020 while liquids will drop by a higher 67% to 600K barrel/day (bpd) from 1.8mil bpd. Even with capex being deployed over the past 4 years, Southeast Asia’s liquid production has been declining significantly, down by 36% to 1.8mil bpd in 2020 from the peak production of 2.8mil bpd in 2000. This is expected to slide further to 1.6mil bpd in 2025 and 1.4mil bpd in 2030.

• Rising global gas demand. Global liquefied natural gas (LNG) demand is expected to double to 730mil tonnes (mt) in 2040 from 370mt in 2020 driven by rising electricity demand with natural gas being a transitional fuel towards net-zero emission goals. East Asia, predominantly China, accounted for the largest regional share of global demand at almost 50% in 2020. As such, 360mt of new supply is needed to be developed by 2040, of which half of the additional output is projected to stem from North America and 25% from Africa.

• Substantive supply shortfalls even based on projects to be sanctioned now. Based on a base case demand scenario premised on projects deemed likely to be sanctioned, Rystad Energy expects global liquids supply shortfalls of 22mil bpd (22%) by 2030 and 28mil bpd (35%) by 2040. Almost half of the global liquid production of 80mil bpd in 2030 is projected to derive from the infilling programmes of non-shale producing fields, as conventional output naturally declines by 54% over the next 10 years. Hence, substantive global investments are still required over the next 10–20 years to stave off the projected supply deficit. In the absence of such investments, we expect another super bullish cycle, similar to the 2004–2007 run-up, which will drive crude oil prices to levels well above US$100/barrel.

• Malaysia to account for bulk of Southeast Asian investments. In Southeast Asia, the value of final investment decisions (FID) for oil & gas projects is expected to surge by 3.5x YoY this year to 700mil boe, and more than double to 1.7bil in 2022. Malaysia will account for over 80% of Southeast Asia’s FID in 2021 and 50% in 2022. Over the longer term, deepwater investments are expected to be more prominent, peaking at US$6bil in 2027 from just US$2bil in 2020. By 2024, deepwater projects will make up over 60% of the region’s sanctioned resources. Additionally, subsea tiebacks and floater solutions will gain traction as national oil companies optimise their capital expenditures under net-zero emission agendas.

• Maintain OVERWEIGHT rating on the sector for the next 12 months as crude oil prices have risen by 74% to US$75/barrel currently from an average of US$43/barrel in 2020, supporting a global resurgence in capex rollouts and structural re-rating prospects of independent E&P producers and service providers. This is further underpinned by our 8 BUY calls vs. only 1 SELL for Serba Dinamik given the accounting issues raised by its own auditor. For direct exposure to higher crude oil prices, we recommend Hibiscus Petroleum, which is a pure E&P operator with concessions in Malaysia, Vietnam and United Kingdom. We continue to like Dialog Group for its resilient non-cyclical tank terminal and maintenance-based operations and Yinson’s 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 as its completed RM10bil debt restructuring package positions 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 - 24 Jun 2021