Last week, OPEC+ agreed to extend its current production cuts of 9.7m bpd by an additional month to July 2020. From then on, the cuts will subsequently see a step-down to 7.7m bpd until December 2020. Overall, while we do not expect this to lead to any significant rally in oil prices, it will no doubt help stabilise the current recovery trajectory. If anything, this would also be symbolic of OPEC+’s intention of helping to stabilise oil prices, especially after falling out over a disagreement in cuts earlier in the year. The cut of 9.7m bpd represents ~10% of global supply during normal times. While the global oil market would still be in a production surplus state even after the extended cuts, market surplus is believed to have already peaked in April 2020 as global lockdowns begin to ease, with demand-supply expected to eventually reach an equilibrium in 2H2020. That said, value chains across the entire oil and gas sector are still expected to suffer from slower activities amidst the global trend of reduced capex and opex among oil producers. One name to highlight as a potential immediate beneficiary of oil prices recovering is HIBISCS (Not Rated). With its cash opex at ~USD25-30/barrel, oil prices hovering at current levels would thus ensure that it will not be operating at a negative cash flow level. Overall, we maintain NEUTRAL on the sector, still advocating cautiousness. Many names within the sector are still expected to see earnings volatilities in the coming quarters, with increased possibilities of further asset impairments. Stock picks namely DIALOG and SERBADK are arrived at based on strong balance sheet coupled with ability to continue delivering earnings growth despite challenging environment. Nimble traders may look to ARMADA and UZMA as potential bottoming-out plays, given their attractive valuations.
OPEC+ agrees to extend 9.7m barrels per day production cuts. Last week, OPEC+ agreed to extend its pledged 9.7m barrels per day (bpd) output cuts until end of July 2020. Prior to this, production cuts were supposed to be eased down to 7.7m bpd in July until December 2020 under the previous agreement. This means that now under the latest agreement, the production cuts of 9.7m bpd applied in May-June 2020 will see an additional one-month extension, before tapering down to pre-agreed level of 7.7m bpd up in August 2020 until end of the year.
One-month extension in cuts to help stabilise oil price recovery. While we do not expect the extended production cuts to lead to any significant rally in oil prices, this will no doubt provides some relief and help stabilise oil prices in its recovery trajectory, at least for the time being. If anything, the cuts would pose as a symbolic gesture of OPEC+’s intention of stabilising crude oil prices, despite falling out to a disagreement earlier in the year. The production cut of 9.7m bpd represents ~10% of global supply during normal times, although the Covid-19 pandemic had effectively removed global demand by 25-30% during its peak in April 2020. That said, while the global oil market would still currently be in a production surplus state even after the extended cuts, one positive is that production surplus had already peaked in April 2020, and is expected to gradually subside in the coming months as global lockdown gradually eases. Based on the current recovery trajectory, EIA is forecasting the oil’s global demand-supply to eventually reach equilibrium in 2H2020. We are keeping our 2020 average Brent crude price assumption unchanged at USD40/barrel, anticipating stabilising oil prices at USD40- 50/barrel levels.
Value chains still expected to see slower activities. Nonetheless, amidst the global trend of capex and opex cuts, the entire oil and gas value chain is still expected to see slower activities overall. We highlight HIBISCS (Not Rated) as one name that may potentially see immediate gain from the oil price recovery, being in the exploration and production (E&P) space. With its cash break-even per barrel roughly at ~USD25-30, oil prices sustaining at current levels would virtually ensure that it will not operate at negative operating cash flow. This is on top of its healthy net-cash balance sheet which supports the sustainability of the company.
Maintain NEUTRAL. Overall, we still advocate caution for the sector. Most of the names within the sector are expected to see volatilities in earnings for the upcoming quarters, with high possibilities of provisions and impairments. For our stock picks, we favour proven-resilient names with strong balance sheet as well as ability to continue delivery of earnings growth despite a challenging environment – namely DIALOG and SERBADK. Meanwhile, bottom-fishing ideas for more “risk-on” investors include ARMADA and UZMA, given their attractive valuations, as well as the aforementioned HIBISCS.
Source: Kenanga Research - 9 Jun 2020
Created by kiasutrader | Aug 26, 2024