Highlights

• We recently organised a half-day event focusing on the oil & gas (O&G) industry prospects and how industry players are navigating through the current tough industry environment. The key participants at our event were IHS-Markit, Petronas, MPRC, Uzma and Serba Dinamik. Below are the takeaways from the event.

• Oil majors’ emphasis has shifted from absolute growth of oil reserves to cost of oil production. As a result, cost of supply has replaced absolute supply of oil as the major determinant of oil prices.

• Expectation on significant growth in US tight oil production due to lower cost of tight oil industry players, lack of capital discipline among industry players and loose monetary environment.

• Going forward, merger & acquisitions of existing listed O&G companies is a cheaper way to grow proven reserves due to significant increase in organic replacement costs per barrel of oil coupled with the share price correction of the upstream O&G companies.

• Oil price outlook of Petronas is around USD50s to USD60s per barrel and Petronas continue to emphasize on the important of cost efficiency. This is in line with HLIB oil price forecast of USD55-65 per barrel.

• Publishing of Petronas Activity Outlook is to promote information transparency in order to rebalance market dynamics and support industries like investments and financing which are crucial components in promoting a thriving oil and gas ecosystem.

• In order to sustain operations under the expectation of ‘lower than longer’ oil prices, oil majors are making adjustments such as divesting non-core assets, reducing cost of operation, exploring non-fossil fuel alternatives and maximize value from other divisions of current business.

• For local industry players, Malaysia Petroleum Resources Corporation (MPRC) suggested a few potential strategies to capitalize on current difficult operating environment such as increase economies of scale, move up the value chain, develop innovative technologies, expand to international market and diversify to support downstream opportunities.

Risks

• A sharp decline in crude oil prices.

Rating/ Valuation

Maintain NEUTRAL

• Going forward we understand that Petronas will continue to focus more on cost per barrel of oil rather than absolute growth in oil reserves. As a result, we do not expect upstream capex to increase significantly from current level. Nevertheless, we opine that upstream activities are recovering albeit at a slower rate due to recovery of oil prices.

• Top picks: Dayang ( BUY ; TP: RM0.91 ) and UMWOG ( BUY ; TP: RM0.44 ).

Source: Hong Leong Investment Bank Research - 28 March 2018