We expect crude oil prices to average at USD55/bbl (from USD50/bbl previously) based on (i) OPEC’s commitment to stabilise oil prices at higher levels, (ii) recent Covid-19 vaccine developments, (iii) buoyant crude oil demand from China and (iv) decreasing US crude oil inventories. While the downside risks for crude oil are still apparent, we believe that the fundamentals of crude oil prices are improving. However, most O&G players in Malaysia are still predominantly dependent upon Petronas’ capex spending. We believe that Petronas would still remain frugal on its capex spending as the Malaysian government is still heavily reliant on Petronas for its dividends. Maintain NEUTRAL on the sector as we believe that earnings recovery for O&G services players is not imminent at this juncture. Our top pick for the sector is Bumi Armada (BUY; TP: RM0.65).

OPEC agrees to ease production by 500kpd. While consensus have expected OPEC+ to maintain its current level of 7.7mpbd production cuts up till the end of March, the decisiveness from OPEC+’s part on the aforesaid matter offers great reassurance with regards to its commitment to keep oil prices afloat.

Oil demand expected to be supported by China demand and lower US crude oil inventory. We believe that oil demand would be supported by better than expected economic recovery in China and declining US crude oil inventory.

Vaccine discovery is key for an oil price recovery. The successful distribution of an effective vaccine could more than offset all headwinds that are currently plaguing the O&G industry as the demand for oil could rise by almost 10mpbd. Furthermore, future production of oil is expected to remain lower than pre-Covid-19 levels due to the massive capex cuts on E&P activities from most oil majors.

Downside risks to oil prices. (i) Resurgence in Covid-19 cases globally could dampen demand for oil and (ii) soaring Libyan oil production could also pose a risk towards oil prices as Libya is exempted from OPEC+ cuts until its output stabilizes at 1.7mbpd. Libya’s oil production has already exceeded 1.2mbpd in November from below 100kbpd just 2 months ago. (iii) Easing of sanctions on Iran and Venezuela could add at least c.2mbpd of supply to the oil market in the long-run.

Upward revision in oil prices. Based on the aforementioned factors, we revise our average oil price forecast from USD50/bbl to USD55/bbl in 2021 and we introduce our 2022 oil price forecast at USD60/bbl. We believe that crude oil demand would surpass supply in 2021 and a greater equilibrium is expected after a discovery of a successful vaccine.

Forecast and changes in call/TP: We make no changes to our earnings assumption post-3QCY20 results but have revised our target prices for Velesto and MMHE by raising our P/B targets for Velesto and MMHE to 0.4x and 0.3x (from 0.35x and 0.2x previously) based on the improving sentiments on oil prices, maintaining our HOLD rating. Hence, our TP for Velesto and MMHE rises to RM0.14 and RM0.43 (from RM0.12 and RM0.30 previously). We have also downgraded our call on PCHEM from Buy to HOLD, leaving our TP and call unchanged as share prices have already increased by 34% since our upgrade on the stock.

Maintain NEUTRAL. We believe that it is not the time yet to be Overweight on the sector as we opine that Petronas will not ramp up on its capex spending despite higher oil prices due to its dividend commitments to the Malaysian government. Our top pick for the sector is Bumi Armada (BUY; TP: RM0.65). While Bumi’s share price has increased by 66% since we have upgraded the stock, we believe that there is still plenty of upside as we view that the stock is still undervalued, trading at a FY20/21 P/E of 5.5/5.4x.

Source: Hong Leong Investment Bank Research - 7 Dec 2020