We expect crude prices to remain volatile with a lower average of USD60/bbl (YTD 2020: USD67/bbl) premised on compliance of OPEC+ and the absence of supply shocks, although the recent events in the Persian gulf will continue to drive upside price risk in the near term. Upstream activities are likely to maintain its momentum from 2019. Velesto is our top sector pick.

Lower average price for Brent in 2020. In 2020, we still expect crude prices to remain volatile, with downside price risk capped in the near term due to: (i) geopolitical tensions and (ii) OPEC+ maintaining output cuts (1.2mbpd + an additional 0.5mbpd up to 1Q20). According to EIA forecasts, Brent spot prices will average $60/bbl in 2020 (2019 avg. USD64/bbl). EIA expects average crude oil prices will be lower on in 2020 vs 2019 because of forecasted rising global oil inventories, particularly in the first half of next year against a backdrop of sluggish global economic growth. We concur with EIA’s views on the back of (i) greater output growth from non OPEC players such as Norway and Brazil and (ii) shale players increasing output by 0.9mbd (+7.3% YoY) against an un-resolved China-USA trade dispute. Thus we are of the view that Brent crude oil price could average USD60/bbl in 2020 (2020 YTD: USD67/bbl) in the absence of a supply shock.

Geopolitical tension & OPEC. The OPEC meeting convened on the 5th-6th of December resulted in the cartel agreeing to increase the output cut by 0.5mbpd to 1.7mbpd or c.1.7% of total world supply up to 1Q20. We understand that Saudi Arabia is to shoulder the bulk of this burden with OPEC reducing 0.34mbpd whilst the remainder going to Russia. Volatility in oil prices will continue to be heightened in the near term due to recent developments between USA and Iran.

PAO. With respect to domestic capex, Petronas has released the updated Petronas Activity Outlook 2020-2022. Based on the 2019-2021 PAO, the guidance of activity level in the upstream space is premised upon a crude assumption of USD60-70/bbl; however Petronas has excluded this disclosure in the latest version. Despite this, based on its President’s comments on mainstream media, we understand that Petronas’s view for oil price in 2020 is c.USD55/bbl. Key changes in areas in demand for activities include jack-up rigs 16 JUR vs. 19-17 previously), HWUs (4 units vs. 3-2 units previously), tender rigs (3 units vs. 4-3 units previously), OSVs (Production: 134 OSV’s; Drilling: 256 OSV’s vs High case: 243 OSV’s ; Low case: 228 OSV’s ), HUC (4.6m man hours – unchanged), MCM (18.9m man hours vs. 17.6m man hours previously) while higher offshore fabrication works were guided (high case:13WHP & 1CPP; base case: 10WHP & 1CPP vs. high case: 13WHP & 2 CPP; base case: 6WHP & 1CPP previously).

Is the worst over? PCHEM and CCM had a whirlwind of an FY19 on the back of softer ASP’s and higher plant statutory shutdowns (the former). Although we remain wary on persistent weakness in ASP’s on overall softer demand dynamics caused by the trade war. In 2020, we should see solid absolute volume growth led by PIC (from 2H20; +14% YoY) and PGW1 (Dec-19 +50% YoY) to buffer the ASP weakness.

Reiterate NEUTRAL. We are maintaining our earnings for now across our coverage. Our top pick is Velesto (BUY, TP of RM0.46 based on 1.3x FY20 P/B multiple or +1SD above its 5 year mean P/B; we deem this justified as we are of the opinion that the jack up rig market is on the cusp of an upswing cycle). It remains an excellent proxy to the uptick in upstream exploration and production activities.

Source: Hong Leong Investment Bank Research - 13 Jan 2020