HLIB Research keeps ‘neutral’ on O&G sector, sees oil prices to continue trading sideways in 3Q

TheEdge Tue, Jul 21, 2020 11:13am - 3 years View Original


KUALA LUMPUR (July 21): Hong Leong Investment Bank (HLIB) Research has maintained its ‘neutral’ call on oil and gas sector, as it expects crude oil prices to trade sideways from its June average price in the third quarter of 2020 (3Q20) on slower demand recovery arising from reemergence of lockdown measures from Covid-19.

HLIB Research analyst Low Jin Wu believes that OPEC+ would continue its 9.7 mbpd production cuts target into 3Q20 to support oil prices.

“While compliance was only 85% in May and circa.90% in June, we believe that OPEC+’s compliance would be higher going into July and Aug despite its plans to reduce production cuts by 2 million to 7.7 million bpd from Aug onwards, which would bring the oil market closer to equilibrium.

"Furthermore, the decline in US production from the closure of shale rigs would also act as an impetus for the oil market to reach equilibrium,” said Low in a note.

At the time of writing, Bursa’s Energy Index, which tracks the share prices of oil and gas-related companies rose 18.37 points or 2.41% to 779.73 points.

The top six active stocks include Reach Energy Bhd which rose half a sen or 6.67% at eight sen, KNM Group Bhd up one sen or 4.76% at 22 sen, Bumi Armada Bhd increased 2.27% or half a sen at 22.5 sen, Sapura Energy Bhd rose one sen or 11.11% at 10 sen, Barakah Offshore Petroleum Bhd jumps 22.22% or one sen at 5.5 sen, meanwhile Daya Materials Bhd slumped 40% or one sen at 1.5 sen.

Low added as Petronas has announced that it has panned to cut capital expenditure (capex) by 21% (circa RM10 billion) due to the crash in oil prices as a result of Covid-19, he does not rule out the possibility if this going beyond its 21% pledged capex and he assumes a 30% cut.

“Malaysian O&G services players are predominantly dependent upon Petronas’ spending for its survival and any capex cuts from Petronas would directly impact most listed O&G players in Malaysia.

“We are negative on companies which are heavily reliant on Petronas’ capex spending as we believe that Petronas would be conservative on its capex spending at least until 1HFY21 and we remain neutral to positive on companies less reliant on Petronas’ capex,” he noted.

Besides, Low views that the share price of Petronas Chemicals Group Bhd (PetChem) has run ahead of its near-term fundamentals as most product prices (except polyethylene and urea) are still significantly below its price at the start of the year, while PetChem’s share price has recovered significantly.

Low named Bumi Armada Bhd as HLIB's top pick with a ‘buy’ rating and target price of 41 sen based on a 10.3 times FY20 earnings per share for its stable and strong FPSO (floating production storage and offloading) earnings contribution (>80% of revenue) and undemanding valuations.

The second top pick is Dialog Group Bhd (‘Buy’, TP: RM4.23 based on DCF with a weighted average cost of capital of 7%) for its stable and cash-strong business model as tanker rates are holding steady.

“Overall, we expect demand to recover from most countries which are in its recovery stage and this will mitigate the potential lost in demand from nations severely affected by the pandemic. We believe that oil prices would be closer to its equilibrium in 4Q20 and we expect Brent crude oil to average at USD55/bbl in 2021 as we expect a more balanced oil market then,” he said.

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