Saudi Arabia and Russia have agreed to extend the current production cut for another 6 to 9 months, which is expected to end earliest Dec-19 or Mar-20. This decision is still subject to discussion with the rest of the OPEC countries, which will be meeting on 1–2 July to renegotiate the pact. The quantum of the output the cut is reported to be similar at current 1.2mmbpd, which is a positive. Petronas Chemical (PCHEM), Serba Dinamik, Velesto Energy and Kelington make up our top Buy lists in the sector.

Extension Widely Expected, Quantum Surprised

The production cut extension is widely expected by the market. However, the 1.2mmbpd cut is positive, as we had earlier expected a small cut in view of the current rebalanced oil market (refer to Fig 4). On the flip side, this also reflect both countries’ worries over global supply and demand dynamics moving into 2020E as a result of rising US output, albeit seeing a slower growth, but more importantly the worrying global economic growth.

Sentiment May Drive Short-term Recovery in Brent Prices

Notwithstanding, the news to extend the deal will likely see Brent global oil prices trend higher towards the upper range of our 2H19 oil price forecasts of US$65-70/bbl in the near term. Moreover, the temporary truce between US and China may also lend support to global oil prices as negative sentiment over global demand worries temporary eases off. The higher oil prices will also likely see work activities sustaining for the rest of 2H19, potentially leading to better sector earnings growth.

Maintain Neutral, But See Opportunities

The renewed positives driven by the production cut extension and USChina truce will likely see some interests back into the sector. We continue to favour companies with promising earnings growth prospect like PCHEM (BUY; TP: RM10.10) with the RAPID project expected to increase current capacity by 15%, and Serba Dinamik (BUY; TP: RM5.50) with its record high RM8.7bn order book. We also like Velesto Energy (BUY; TP: RM0.40) given the recovery in drilling rig outlook and Kelington (BUY; TP: RM1.72) with the commencement of its liquid carbon dioxide plant being a catalyst.

Source: Affin Hwang Research - 1 Jul 2019