PETALING JAYA – Hong Leong Investment Bank (HLIB) Research said a proposed cut in global oil production is not sufficient to improve earnings of Malaysian oil and gas services players.
In a research note yesterday, it said this is because the anticipated oil prices improvement is not expected to lift oil producers’ capital expenditure (capex) significantly, at least in the medium term.
HLIB Research is of the view that the current development would not bring about a re-rating to the overall industry as capex spending is not expected to improve significantly while the upstream industry still has to face asset oversupply overhang for the time being.
The industry’s recovery would be slow next year with activities expected to pick up but not sufficiently to change the current fundamentals of the oil and gas industry, it noted.
The Organisation of Petroleum Exporting Countries (Opec) indicated in a recent meeting in Algeria that it could cut its oil output by 240,000 to 700,000 barrels a day to stabilise the oil market. The details will be fleshed out at a meeting in Vienna on Nov 30 whereby cuts for each Opec member country will be decided.
While any output cut is positive for market sentiment, HLIB Research said, the proposed cut could be undermined by three main issues: three major countries – Iran, Nigeria and Libya – are exempted from the cut, which means any output increase by them could offset Opec’s proposed cut; secondly, Opec’s oil production is still at an eight-year high and a cut of the proposed magnitude might not be sufficient; with oil prices rallying, US shale producers could easily ramp up their production within six months due to their short oil investment cycle.
HLIB Research believes its forecast for Brent of between US$50 and US$60 (RM210 and RM252) a barrel would still be valid given that US$60 a barrel would be the estimated breakeven for US shale oil.
HLIB Research said the only company which would be directly impacted by oil price movement in its coverage universe would be SapuraKencana Petroleum Bhd.
“According to our sensitivity analysis, an incremental US$10 per barrel improvement in Brent oil prices would bring about 42% increase in our current earnings forecast,” it noted.
For asset-based players, which are valued using the price-to-book value method, every 0.1 times increase in target multiple would bring 15% to 30% improvement in its fair values for local oil and gas companies.
“As for price-to-earnings-driven companies, every 1.0 time increase would improve its target prices for companies by 10% to 15%,” it added.
Oil prices were trading lower yesterday, with international benchmark Brent crude down 57 cents to US$51.38 per barrel at 1348 GMT, Reuters reported. US West Texas Intermediate crude was trading at US$49.65 per barrel, down 70 cents from their last settlement.