Oil and gas sector
Maintain neutral: We maintain our earnings forecasts for now across our coverage. Our top pick is Velesto Energy Bhd (“buy”; target price: 46 sen). We deem this justified as we are of the opinion that the jack-up rig market is on the cusp of an upswing cycle. It remains an excellent proxy for the uptick in upstream exploration and production activities.

 
We expect crude prices to remain volatile with a lower average of US$60 (RM243.60) per barrel premised on compliance of Opec+ and the absence of supply shocks, although recent events in the Persian Gulf will continue to drive upside price risk in the near term. Upstream activities are likely to maintain their momentum from 2019.

In 2020, we still expect crude prices to remain volatile, with downside price risk capped in the near term due to geopolitical tensions and Opec+ maintaining output cuts.

According to Energy Information Administration (EIA) forecasts, Brent spot prices will average US$60 per barrel in 2020 (2019 average: US$64 per barrel). The EIA expects average crude oil prices to be lower in 2020 because of forecasted rising global oil inventories, particularly in the first half, against a backdrop of sluggish global economic growth.

We concur with the EIA’s views on the back of greater output growth from non-Opec players such as Norway and Brazil and shale players increasing output by about 900,000 barrels per day (up 7.3% year-on-year) against an unresolved China-US trade dispute.

Volatility in oil prices will continue to be heightened in the near term due to recent developments between the US and Iran.

With respect to domestic capital expenditure, Petroliam Nasional Bhd (Petronas) has released the Petronas Activity Outlook (PAO) 2020-2022. Based on the 2019-2021 PAO, the guidance of the activity level in the upstream space was premised upon a crude assumption of US$60 to US$70 per barrel. However, Petronas has excluded this disclosure in the latest version.

Despite this, based on its president’s comments in mainstream media, we understand that Petronas’ view for the oil price in 2020 is about US$55 per barrel. — Hong Leong Investment Bank Research, Jan 13