Highlights

HLBank Research Highlights

Author: HLInvest   |   Latest post: Fri, 4 Dec 2020, 10:00 AM

 

Oil & Gas - Biden Win May be Negative for Oil

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We foresee crude oil prices trading sideways with downside bias towards the end of CY20 due to (i) higher crude oil production from Libya, (ii) reduced China demand, (iii) resurgence of Covid-19 cases globally and (iv) resolution of Norway’s labour union strike. This will be partially mitigated by OPEC’s commitment to support oil prices in the event of further price weaknesses. We also opine that a Biden victory would be negative for oil prices due to his commitment to reduce carbon emissions. We revise our 4Q20 Brent oil price forecast from USD50/bbl to USD42/bbl while cutting our CY21 Brent oil forecast from USD55/bbl to USD50/bbl. Maintain NEUTRAL on the sector as we believe that the prospects for the O&G sector is not bright yet at this juncture despite the recent price weaknesses. Our top picks for the sector are Bumi Armada (TP: RM0.60; BUY) for upstream and PCHEM (TP: RM6.50; BUY) for downstream.

What’s happening in the oil market right now?

1. Libya has risen its oil production from <100kbpd in early September to c.300kbpd currently due to the lifting of the blockade from General Khalifa Haftar. Governor of Libya’s central bank states that it needs to raise oil production to 1.7mbpd to compensate for current levels as the shut down of the country’s oil production and exportation since 2013 has cost Libya c. USD180bn in losses.

2. OPEC and its allies said they would be "proactive and pre-emptive" in addressing the diminishing price, recommending "participating counties take further necessary measures". Saudi Energy Minister said there could be a change of direction in production policy forthcoming as the price of oil continued to slide.

3. Saudi Aramco has cut CAPEX and is reportedly looking at further cuts amid reduced cash flows, profits and mounting debt to levels above the company's targets. Its main commitment is still to pay out annual dividends of USD75bn.

4. Offloading of floating storage is currently happening in China due to its massive restocking of crude oil when oil prices were averaging below USD30/bbl. Chinese crude oil imports is expected to fall for the first time in 6 months.

5. General polls have shown that Biden have gained a decisive upper hand in the presidential race with a 57-41% voter approval margin. Biden has proposed to spend a staggering USD1.7tr in federal spending over the next decade to achieve his goal of lower net carbon emissions.

6. Norwegian oil firms struck a deal with the labour union officials on 10th of October, ending a 10-day strike that had threatened 25% of the country’s output by next week.

Oil prices to remain weak in 4Q20. We believe that (i) higher Libyan oil production, (ii) lower Chinese crude oil imports, (iii) the resurgence of Covid-19 cases globally and (iv) resolution of Norway’s labour union strike are expected to exacerbate the oversupply situation in the near term. Looking ahead, with no concrete vaccine rollout timeline, oil demand is expected to remain flattish in 2021. This is negative for the tanker industry as there would be less demand for the transport of crude oil and its products.

Joe Biden victory would be negative for oil prices. We believe that a Joe Biden victory would be negative for oil prices, as the presidential candidate has proposed to spend USD1.7tr for renewable energy initiatives, in-line with its zero net carbon emissions initiatives by 2050. A Biden win would be a leading indicator of falling oil demand from the US while a Trump victory would be positive for oil prices as climate change is “not the top of his list” and reducing carbon emissions is not in his agenda. However, a Joe Biden victory would be negative for the fracking industry as Biden is a huge adversary of fracking. Hence, we do not see shale oil production going back to levels it was previously even if oil prices recovers significantly. From a fundamental point of view, the supply dynamics of oil in the US is not expected to change significantly in the short-term as oil prices is expected to remain low, however the long-term implications of a Biden victory is expected to cause some price weakness in crude oil.

OPEC to support oil prices if it declines further. OPEC has claimed that it would take necessary measures to support oil prices in the event of sustained price weakness. We believe that OPEC might extend or increase its production cuts if the aforesaid scenario happens. Furthermore, A Biden victory might also be positive to OPEC’s control over crude oil prices as Biden has always been an opponent of fracking and a huge proponent of green energy. This would make it easier for OPEC to control oil prices. We believe that OPEC would increase or extend its supply cuts if oil prices falls below USD40 for an extended period of time (c.2-3 months).

Forecast. We believe that the short-term prospects for crude oil prices would be neutral to negative given (i) resurgence of Covid-19 cases, (ii) higher production from Libya and (iii) lower China imports act as headwinds towards crude oil prices. We lower our 4Q oil price forecast from USD50/bbl to USD42/bbl bringing our CY20 Brent oil forecast to USD43/bbl. We also lower our Brent oil forecast from USD55/bbl to USD50/bbl for CY21. For stocks, we have downgraded MISC from a Buy to a HOLD at TP of RM7.69 based on SOP, revising our earnings by -5.3/-2.2/-2.1% for FY20-22F and imputing a lower P/B multiple of 1.5x for its Petroleum segment (previously 1.75x) as we expect weaker oil demand to affect tanker rates across the board despite the commissioning of its 6 VLEC tankers in FY21. Its Mero 3 FPSO is only expected to contribute positively to earnings in FY24.

Maintain NEUTRAL. Based on the aforementioned points raised, we do not foresee Petronas elevating its upstream capex in the next 6-months. The prospects for upstream services players are still negative. However, most upstream services names have already went through a sizable decline in its share price. The share price of upstream services players like Dayang, Velesto, MMHE are expected to stay muted in the near-term and have fallen within our hold call thresholds. Our top picks are Bumi Armada (TP: RM0.60, BUY) for its strong FPSO earnings and relative insulation from the volatility in oil prices and Serba (TP: RM2.50; BUY) for its strong recurring income from its O&M segment and large current orderbook backlog of RM18.5bn. We also like PCHEM (TP:RM6.50; BUY) as Petrochemical ASPs have increased due to delays and deferrals of impending petrochemical plant additions and improved demand of plas tics from the healthcare sector.

Source: Hong Leong Investment Bank Research - 14 Oct 2020

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Labels: ARMADA, PCHEM, SERBADK

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