While we were positively surprised with the OPEC’s decision to deepen existing production cuts in 1QCY20, we were somewhat disappointed that the coalition failed to announce any extension of production cuts beyond that. We still view that continued production cuts is imperative to sustaining oil prices at current levels, with further downside risks coming from: (i) enforcement measures of production cut compliance among OPEC members, (ii) continued uncertainties in U.S.-China trade tensions, and (iii) continued rise in U.S. oil output. Overall, we assumed an average Brent projection of USD60/barrel for 2020-2021. Meanwhile, local upstream activities are expected to stay elevated from high levels seen in 2019, as guided in Petronas’ latest Activity Outlook. We have identified selective biggest winners to include: (i) fabricators (e.g. MHB, SAPNRG), to benefit from the high surge in number of WHP, and (ii) marine vessel providers (e.g. ALAM, COASTAL, ICON, PERDANA), benefiting from surge in AHTS demand. Offshore maintenance players (e.g. DAYANG, CARIMIN) is also expected to see further increase in works, even after a high in 2019, while VELESTO is also anticipated to see healthy utilisations on the back of sustained jack-up drilling rig demands. Maintain NEUTRAL on the sector, given limited upside to large-cap Petronas-related counters, although with increased optimism towards equipment and services providers. As for stock selections, defensive and growth-seeking investors could seek out stable names such as YINSON and SERBADK, although bargain hunters could target some laggard-play angle in heavily discounted names, of which we like PANTECH, SAPNRG, UZMA and COASTAL.
Deepened production cuts until 1QCY20. Earlier in December, OPEC+ has agreed to deepen existing cuts by an additional 500k barrels per day (bpd), effective 1 Jan 2020. This would see total pledged production cuts of 1.7m bpd (from previously 1.2m bpd) based on Oct 2018 benchmark. Saudi’s additional voluntary cut of another 400k bpd would thus see a total of 2.1m bpd of production taken off the market. While the deepened production cut was undoubtedly a positive surprise, we were slightly disappointed that the coalition did not manage to extend production cuts to beyond its existing cut-off date. As it stands, current production cut arrangement would cease in end-1QCY20, unless the coalition can form a consensus in its next meeting in early March 2020.
Extended OPEC cuts imperative to sustaining oil prices. One key challenge of the OPEC+ coalition is the enforcement of production cut compliance among participants. While OPEC-11 (as a single entity) has thus far fully complied with pledged production cuts, mainly led by Saudi’s limiting of output, Russia meanwhile was relatively inconsistent – meeting compliance for only 3 of the last 11 months. With that said, some may see Saudi’s pledged increased production cuts as a mere formalisation of its existing production levels, given that the nation has been the main contributor in the coalition for production cuts. Nonetheless, we feel that officially extending production cuts to beyond current 1QCY20 cut-off is imperative for oil prices to sustain at current levels, with any indication of a failure to do so posing as downside risks. Further downside risks, apart from the aforementioned enforcement of cut compliance, could also include an inconclusive U.S.-China trade war, which will spur further uncertainties on the demand side, as well as the continued increase in U.S. oil productions, albeit at a slower growth rate. Overall, we assumed an average Brent projection of USD60/barrel for 2020-2021, anticipating mild pullbacks once demand-supply dynamics start to normalise.
Local upstream activities to stay elevated. While 2019 has mostly been a rebound year for many local oil and gas services and equipment providers, we are expecting to see a continuation of the elevated activity levels going into 2020. A read-through of Petronas’ latest Activity Outlook 2020-2022 was mostly positive, as most upstream value chains are expected to see approximately maintained levels from 2019, while several of them anticipated to see a surge. Of which, we identified the biggest winners to include (i) fabricators (e.g. SAPNRG, MHB), with almost a doubling in the number of well-head platforms (WHP), and (ii) marine vessel players (e.g. ALAM, ICON, PERDANA, COASTAL), with a huge surge in the number of anchor handling tug supply (AHTS) vessels. Meanwhile, offshore maintenance players (e.g. DAYANG, CARIMIN) is also expected to enjoy continued increase man-hours requirement even after a high in 2019, while jack-up rigs provider (i.e. VELESTO) is also expected to continue enjoying high utilisation amidst sustained rig demands.
Source: Kenanga Research - 3 Jan 2020
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VELESTO2024-08-27
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VELESTO2024-08-27
VELESTO2024-08-26
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ICON2024-08-26
MHB2024-08-23
DAYANG2024-08-23
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DAYANG2024-08-22
CARIMIN2024-08-22
DAYANG2024-08-22
MHB2024-08-22
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MHB2024-08-21
MHB2024-08-20
ALAM2024-08-20
PERDANA2024-08-19
ICON2024-08-19
MHB2024-08-17
DAYANGCreated by kiasutrader | Aug 26, 2024