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Offshore & Marine – Regional : OPEC’s Supply Hike Within Expectations, Opportunities Abound For Bottomfishing

Shared By Stock Fanatic on Monday, June 25, 2018 | 25.6.18

OPEC concluded its 174th meeting with plans to raise supply, but this will remain within its quota of ~32.5mbpd. A supply hike of 0.7-0.8mbpd is expected, largely within market expectations, and leaves room for oil to be undersupplied by ~0.5mbpd for 2H18. Their actions effectively set a price floor for oil, and recent price pullbacks provide attractive entry levels for oil-related names, on top of a short-term rebound trade. Preferred picks are KEP and WINS. Maintain MARKET WEIGHT.

WHAT’S NEW
OPEC and non-OPEC to raise output by ~1mbpd. The conclusion of the 174th OPEC meeting saw Saudi Arabia reach a consensus to raise output. The official statement was for supply to be raised in order to return to 100% compliance cut of 1.2mbpd, a figure that currently stands at 152%. No official figure was given, but based on remarks from Iranian and Iraqi oil ministers, supply will be raised by 0.7-0.8mbpd.

ACTION
Output hike within expectations, oil price-related stocks to see short-term rally. The quantum of the output hike is broadly in line with expectations of the market, and less than the 1.5mbpd increase that Russia had earlier proposed. Oil related names are expected to see a short-term rally, though we expect pullbacks after as fundamentals take hold.

Keppel Corp - Technical Analysis
Daily Chart
Sembcorp Marine - Technical Analysis
Daily Chart
SMM and KEP expected to react positively to this development. Large caps are likely to be the safer proxies to ride this development, owing to their stronger balance sheets. Within the space, our picks are Sembcorp Marine (SMM SP) and Keppel Corporation (KEP SP).

Value emerging for KEP. The property division makes up close to 70% of our S$9.00 valuation for Keppel. Even if we were to apply a 30% discount (current: 20%) to its Property valuation to account for the soft China property segment, valuation would drop to S$8.27. At current prices, the O&M segment (S$0.58 bvps at 1x 2019F P/B) is given zero valuation. KEP remains our preferred pick for the O&M segment.

Avoid small/mid-cap offshore service names for now. Debt levels remain high for the small-mid cap offshore services names. Several of these firms remain in restructuring talks, or continue to sees losses, so it is best to avoid them. Despite the general improvement in oil price, only utilisation has seen an improvement. Dayrates still remain low due to the oversupply. Our preferred pick to play the offshore service sector remains Wintermar (BUY/Rp298/Target: Rp390).

Ezion - Technical Analysis
Daily Chart
Ezion still a trading play at best. Ezion remains a trading play despite the huge selldown, as earnings may still disappoint in the coming two quarters. Currently trading at ~0.65x 2018F P/B, valuations should not exceed 1.0x P/B, but could face renewed selling pressure should more noteholders convert.

SECTOR CATALYSTS
Catalysts. Mainly, we expect firms to benefit from higher oil prices. For the shipyards, contract wins and M&A will be a boon. We see little catalysts for the offshore service companies for now, as restructuring generally sees their revised book value per share fall below current share prices.

ASSUMPTION CHANGES
• No changes in our assumptions.

ESSENTIALS
Effectively setting a price floor for oil. The output increase more or less offsets the loss of production from Venezuela, Iran, Libya and Nigeria, and brings OPEC’s production slightly above the 32.5mbpd level struck in its 2016 deal. Effectively, this leaves the market undersupplied by ~0.5mbpd and paves the way for Brent to be continually supported above US$70/bbl.

Continued stability in oil prices provides scope for project breakeven prices next year. With Brent price mostly stable at the US$70-80/bbl range, we see scope for oil majors to increase the oil breakeven prices on their projects when budgeting for projects next year onwards. However, the scope of this increase largely depends on each oil major’s outlook for oil. Several oil majors have already shifted towards short-medium term projects, and are generally eschewing the long-term deepwater projects unless presented with highly compelling economics.

Source : UOB KayHian Research
(Read Report)

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Posted on Monday, June 25, 2018 | 25.6.18
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