Dec 01, 2016 11:33:39

Regional Oil & Gas: OPEC Meeting: Christmas Comes Early

OPEC members have been able to resolve their differences and have all agreed to share the burden of production cuts. Starting Jan 17, production target would be 32.5mbpd, a 1.1mbpd cut from Oct 16 level of 33.6mbpd. We had initially anticipated 33mbpd production from OPEC members, as such, our view does not change dramatically as a result of this agreement. We maintain our crude oil price forecast average of USD60/bbl for 2017F and the longer-term. OVERWEIGHT maintained on the mid-stream and downstream players, with upstream players still a momentum play.

¨ We maintain our crude oil price forecast average of USD60/bbl for 2017F and longer-term, with the markets looking to be more bullish than prior to the Organisation of Petroleum Exporting Countries (OPEC) deal. However, there is downside risk from our expectations. The monitoring and implementation of the production cuts could result in non-compliance. Shale oil producers could return at a faster pace. We are also not certain how much this deal hinges on non-OPEC joining. If the deal depends on non-OPEC joining, there are higher chances of non-compliance and the deal can fall apart. Finally, Trump’s actions could provide further challenges for the upstream sector.

¨ Our view does not change much. We view that in that any action by OPEC would be self-defeating – as any intervention would result in higher oil prices, leading to higher cost producers entering the market and lowering oil prices again. We believe that the current oil market mechanism is already working, without its intervention – low crude oil prices are needed to clear the markets by cutting production at the highest cost producers. However, this agreement will in no doubt, should it be well implemented and stretched over a longer period of time, hasten the clearing of the inventory overhang.

¨ As financial markets focus on the shorter-term outlook for oil markets, upstream E&P players are looking at the longer-term picture. Mexico would be auctioning 10 deepwater blocks. This has drawn much interest from global oil majors such as Chevron (CVX US, NR), LUKOIL (LKOD LI, NR), CNOOC (883 KH, NR) and Petroliam Nasional (Petronas). This is one of the Government of Mexico’s first steps in opening up its upstream E&P business that has long been tightly held by its national oil company (NOC), Petroleos Mexicanos (Pemex).

¨ This resonates with our view that there is some glimmer of hope as we enter 2017. We believe that any conventional field development projects that have been put on hold since the oil price collapsed should start to look into locking-in contractors over the next 12 months, in order to take advantage of the current depressed market environment: Regional Oil & Gas: Glimmer Of Hope.

¨ OVERWEIGHT mid/downstream players. Global inventory would likely remain in oversupply in 2017 in our view, thus storage providers and tankers should still benefit – MISC and Dialog Group (DLG MK, BUY, TP: MYR1.77). As we expect markets to remain volatile, we recommend AKR Corporindo, Perusahaan Gas Negara (PGAS) and Yinson as defensive plays with strong balance sheets and negative correlation to crude oil price movements. For seasonal plays where quarterly fluctuations in demand and supply influence product prices, we like Petronas Chemicals and PTT Global Chemicals (PTTGC). Upstream companies remain momentum plays – prefer larger caps: PTT Exploration and Production (PTTEP), Keppel Corp and Sembcorp Industries. (Kannika Siamwalla CFA, Norman Choong CFA, Wan Mohd Zahidi)