AmInvest Research Reports

OIL & GAS, PORTS - Scenario Analysis From Middle Eastern Crisis

Publish date: Wed, 17 Apr 2024, 10:03 AM
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Investment Highlights

  • Increased possibility of escalation in the Middle East as Iran finally retaliates to bombing of Damascus consulate. On 14 April, Iran commenced a retaliatory attack against Israel over its alleged role in masterminding the airstrike on the country’s consulate in Damascus, which resulted in the deaths of 12 Iranians including 2 senior military officials. The incident involves the use of 170 drones and over 120 ballistic missiles supposedly targeting the Nevatim airbase located within the Negev desert. Subsequently, Iran states that it does not intend to continue with further attacks as the government deems the incident concluded based on Article 51 of the United Nations (UN) charter, which stipulates the rights of member countries to self-defense pursuant to an attack.
  • Israel promises to “exact a price”, but with lack of backing as allies urges restraint. In response, the Israeli government has devised a military plan via its war cabinet, but timing and scale remains uncertain for now as its biggest ally, the United States of America (US), urges restraint and are currently attempting to coordinate a diplomatic response to prevent further escalation. President Joe Biden has communicated to Prime Minister Benjamin Netanyahu that the superpower will not participate in offensive moves against Iran. Recall, numerous reports suggest 99% of the attacks by Iran were intercepted only through the combined efforts of the Israel and its allies, the US, United Kingdom (UK) and Jordan. Note that Israel has not waged a multifrontal war since 1973.
  • Muted reaction within oil markets as participants view risks of sanctions on Iran as largely ineffective, in our view. Nevertheless, oil markets remained dull as Brent crude oil prices remains largely unchanged at US$90.40/barrel at opening trade on Monday (15 April), or +0.3% vs. prior day close . We believe this is due to 2 factors:

    a. Run-up in Brent crude oil prices which has risen by 17.3% YTD following concerns over lower primary oil refining capacity levels in Russia and the rollover of production cuts by Organisation of the Petroleum Exporting Countries Plus (OPEC+) to 2Q2024 amounting to an estimated 1.7mil barrel (mbbl) per day; and

    b. Impact of sanctions on Iran-produced Brent crude oil by the US which appears to be largely ineffective thus far. According to the latest data by the Energy Information Administration (EIA), Iran accounts for 3% of total world liquid production. Despite the various primary and secondary sanctions on Iranian produced oil, the country’s crude exports remained strong with March averaging 1.61mil bpd, the highest since May 2023 when they were 1.68mil bpd, according to industry analysts Kpler. Much of it is said to be imported by China; made possible through the use of alternative oil trade routes, ‘dark fleet’ tankers and the recently minted status of Petro-Yuan.
  • Despite slight easing, shipping index remain at 10-year highs from expectations of elevated risks and higher sea freight costs. More relevant to companies under our coverage, the Shanghai Containerised Freight Index (SCFI), representing spot rates for containers loading in Shanghai, has eased by 22% to 1,0757.04 pts from its peak 2,240 pts in mid-January . However, it has shown a slight uptick of 11.6 pts in the week ending 12 April 2024 from the previous week ending 3 April 2024. This shows that freight shipping costs will remain elevated in near term due to geopolitical tensions despite slowly tapering off as many carriers are struggling to meet regular load and planned timelines due to longer transit time.
  • We expect fewer vessels and longer sailing time in 1H2024. According to Mint, insurance paid for Supramax vessels used to be US$10,000 (RM47,705) in October 2023, and had shot up to US$35,000 (RM165,375) in March. The increased war-risk premium in the area is compelling more shippers to circumnavigate through Cape of Good Hope in Africa. The route is estimated to add 4,000 miles to the total voyage length and extra 2 weeks of transit time. The extended sailing times will impact the return of empty containers to Asia; causing temporary shortages of containers and further reduce available capacity for ships departing from Europe and thereby decrease cargo throughput for ports. However, we think the shortages will not last long as the supply of ships has increased since the pandemic catered to high demand of goods of during the quarantine period worldwide. In addition, Maersk has adopted a cost-effective approach to remain resilient via sea-air transportation, enabling customers to transport goods from Asia Pacific via Tanjung Pelepas and air transfer to major airports globally.
  • Our scenario analysis presents a conservative upside to Brent crude oil prices and a later-than-expected recovery in cargo throughput from further escalation. To ascertain the impact to companies under our coverage, we present 2 scenarios, as follows:

    a. Base-Case Scenario: Maintain 2024F Brent crude oil price of US$85/barrel and recovery of cargo throughput by 3Q2024F based on assumption of minor or nil escalation of conflicts with the geopolitical environment remaining status quo. As it stands, global supply and demand levels have remained broadly within our expectations. For reference, this is slightly lower than EIA’s 2024 forecast which was recently raised to US$88/bbl (from US$83/bbl in its January STEO) on the back of OPEC+ production cuts albeit in line with leading consultant Rystad Energy’s forecast of US$85/bbl; and

    b. Worst-Case Scenario: Higher 2024F Brent crude oil price of US$95/barrel and delayed recovery of cargo throughput by 1Q2025F based on assumption of significant decline in Iranian oil production, which will force China to return to formal oil markets to meet current refinery demands and rerouting of remaining ships via the Cape of Good Hope. Though we do not discount the possibility of Brent crude oil prices trading within the US$95-US$100/barrel range, we believe this will be largely based on news and sentiments. However, this is not supported by fundamentals as OPEC+ may increase production given significant amount of spare capacity to maintain its market share . For reference, Moody’s Analytics recently priced in a higher US$10/bbl risk premium in response to the incident.
  • Maintain OVERWEIGHT on Oil & Gas and Ports. Applying our worst-case scenario to impacted companies sees potential for earnings upside for oil & gas players whilst port operators remain largely resilient with minor earnings impact. We highlight 3 companies which we expect will be directly affected given their exposure to the upstream sub-segment and the global shipping industry:

    a. Hibiscus Petroleum (BUY, FV: RM3.44) which is fully exposed to the sub-segment through its direct interest in 4 production assets in both Malaysia and the North Sea, UK. The group expects total sales volume to be in line with its prior guidance at 7.7MMboe in FY24. Our earnings forecast for FY25F is currently based on a conservative full year Brent crude oil price assumption of US$85/bbl. Raising this to account for a US$95/bbl environment sees an earnings upside of 6% as selling prices will continue to remain strong up to at least 2QFY25F, particularly for the Anasuria cluster, which registered a relatively lower average selling price of US$81.96/bbl compared to other production assets. Note that the group reported a combined average realised price of US$90.21/bbl for 2QFY24.

    b. Dialog (BUY, FV: RM2.91) has a partial exposure via assets L53/48 field in Thailand and the D35, D21 and J4 production sharing contract (PSC) in Malaysia. Our current forecasts estimate the assets to contribute ~5% to FY25F revenue based on a full year Brent crude oil price assumption of US$70/bbl. Raising this to account for a US$95/bbl environment sees a minor earnings upside of 1.2%.

    c. Westports (BUY, FV: RM3.83). Our current earnings forecast is premised on recovery in throughput growth by 2HFY24F due to the ongoing Red Sea crisis, which implied a full year growth of 2%. Based on a delayed recovery assumption, we expect to see muted throughput growth, which translates to a slight earnings decline of 3%.

Source: AmInvest Research - 17 Apr 2024

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