• 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.
• 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
Sembcorp Marine - Technical Analysis
• 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
• 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.
• No changes in our assumptions.
• 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