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Regional Oil & Gas - A shot in the arm for oil

Shared By Stock Fanatic on Wednesday, May 9, 2018 | 9.5.18

■ Oil price gets a boost from falling inventory levels worldwide and renewed geopolitical risks; we revise up our forecasts for 2018/19

■ US withdraws from Iran nuclear deal as expected; volatility expected to continue as repercussions felt

Maintain Overweight stance on sector; earnings and TP revised upwards for upstream plays

We revise up our oil price forecasts. As we factor in a premium to account for the increased geopolitical risks in play, better-than-expected compliance to the production cuts from OPEC – mainly due to declining production from crisis-hit Venezuela, as well as faster-than-expected inventory normalisation trends in the US and OECD countries, we are revising up our 2018 average Brent crude oil price forecast to US$70-75/bbl from US$60-65/bbl earlier. Our 2019 average forecast for Brent is slightly lower at around US$65-70/bbl, as we expect some moderation due to rapidly increasing US shale supplies as well as a gradual exit from the OPEC production cuts over time.

Expect volatility as geopolitical wildcards dominate. Geopolitical tensions in the Middle East theatre (read: Syria) rekindled the oil price rally but in recent days, speculations about the US-Iran nuclear deal have gained centrestage. The US President finally revealed his hand and pulled out of the deal last night. Renewed restrictions on Iranian oil exports over the next few months will boost the global demand-supply balance. While mostly factored into current oil prices, we believe volatility will continue as the response from Trump’s European allies, as well as China and Russia, all of whom are signatories to the existing deal, is still uncertain at this point.

US shale oil growth is a moderating influence. US oil production is averaging around 10.6mmbpd currently, about 1.1mmbpd higher than the 2017 average. As oil prices rally, it remains to be seen whether shale oil producers will use extra cash flows to boost production even further or be more restrained.

Good times continue for sector. We maintain our Overweight stance on the sector. Sustained high oil prices should enhance the cash flows of oil majors, driving capex expansion that filters down the value chain.

 Our top picks are
1) Petrochina, CNOOC and Medco as E&P plays to ride the oil price upswing;

2) Sinopec for its growth + yield and M&A angles;

3) Sembcorp Marine and SapuraEnergy, catalysed by robust contract pipeline; and

4) Wintermar on improving utilisation of offshore service assets.

We will continue to avoid service players with stressed balance sheets though. (Read Report)

Source : DBS Group Research

Posted on Wednesday, May 9, 2018 | 9.5.18
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