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Home>AnotherroughyearlikelyforO&G

Jan19,2016|WrittenbyYenNeFoo|0

ThisarticlefirstappearedinTheEdgeMalaysiaWeekly,onJanuary4January10,2016.

FORaworldthatisaddictedto
oil,anabundantsupplyofthe
blackgoldseemstohave
causedalotofanxiety.Oil
traders,analysts,stockmarket
enthusiastsandgovernment
economistshavespentthebest
partof2015crunchingnumbers,
keepinganeyeonregional
geopoliticaldevelopmentsand
anticipatingvolatilecrudeoil
pricemovementsinorderto
avoidplacingthewrongbetson
oil.
Brentcrudelost35.3%in2015
andhititslowestpriceforthe
yearatUS$36.1perbarrel,
sendingchillsdownthespinesofmarketobservers.So,thequestionofhowlowcrudeoil
pricescangomustseemoldbynow.Yet,forthosewhoarestilllookingtowageronthe
beatensector,recentdevelopmentsintheoilmarketshowinvestorscouldbeinfor
anotherroughridein2016.
DeliberateoversupplybyOpecinitsrelentlessdrivetoknockoutshalecompetition
willeventuallyhavetoendPhotobyAFP

InSeptember2015,USinvestmentbankGoldmanSachs,andmorerecentlythe
InternationalMonetaryFund,warnedthatcrudepricescouldplummettoaslowasUS$20
abarrelin2016onthebackofapersistentglut.WiththepossibilityofIran,whichowns
theworldsfourthlargestoilreserves,pumpingmoreafterWesternpowersliftsanctions,

theUSCongressliftinga40yearbanoncrudeexportsandtheOrganizationofthe
PetroleumExportingCountries(Opec)continuesplayinghardballoverscalingdown
production,itisreasonabletoexpectthemarkettobefloodedwithcheapoilnextyear.
Localanalysts,however,tellTheEdgethattheforecastmaybeoverbearish.MIDF
ResearchanalystAaronTansays,Themainissuewiththeoilpriceisnotjustoversupply,
butdeliberateoversupply.
So,whenyoutalkabouttheoilprice,youhavetoconsidertwofactorstheassetbreak
evenpoint,whichisthepointatwhichaparticularoilassetcangeneratepositivecash
flow,andthefiscalbreakevenpointatwhichtheminimumsalepriceforabarrelofoilfor
acountrytoreachabudgetsurplus.Afteracertainpointofdecline,lowpricesbecome
unsustainable.
DeliberateoversupplybyOpecinitsrelentlessdrivetoknockoutshalecompetitionwill
eventuallyhavetoend,hesays.Opechasanunofficialproductionceilingof30million
barrelsperday(bpd),butisproducing32millionbpd.Opeccanstillrampupproductionto
36millionbpd,butthestrainofoverproducinginaclimateoflowpricesisstartingtoshow.
SaudiArabiahasunveiledcutstogovernmentexpenditure,raisedtaxesandslashedfuel
subsidiestocope.Bahrainhasapprovedmeasurestocutstatespendingby30%to
weathertheoilstorm.TheemirofKuwaithaspressedparliamenttoimplementsimilar
fiscalreforms.Eventheoilcartelitselfisreportedlytighteningitsbeltbyreducing
expenditureontravelandfreezingrecruitmentatitsheadquartersinVienna.Thesameis
beingdonebynonOpeccountrieslikeMalaysia.
Further,worriesoverUSoilflowingintotheopenmarketmayalsobeoverplayed.US
shaleoilisheavyandhasahighersulphurcontentthanitscompetitors.AhigherAPI
gravityofshalemeansmanyrefineriesintheworldarestillunabletoprocessit.
EvenifyouwanttoexportUScrude,youneedtohaveofftakers.Globally,notmany
refineriescanprocessheavyoil.Todothat,youhavetorecalibrateyourfacilitiesandthat
cantakesixmonthstoayear,Tansays.
Takingthesefactorsintoconsideration,hesaysthechancesofoilpricesreachingUS$20
perbarrelandstayingthereisveryunlikely.Iexpectpricestoreboundinthesecondhalf
of2016,andoiltotradearoundUS$50perbarrel.
That,though,isnottosaythereisnothingtoworryaboutforinvestorslookingtoputtheir
moneyinoilandgasstocks.Analystssayevenasoilpricesrecoverin2016,corporate
earningsforoilrelatedstocksareexpectedtocomeundermorepressure,thevalueof
contractstobeawardednextyeartoshrinkandanincreasingnumberofimpairmentsand
assetsandrevisionofpricesoftenderedprojects.
Suchaprognosismakesevencherrypickingstocksdifficult.However,KenangaResearch
analystSeanLimsaysalthoughcatalystsforarallyinoilandgasstockswillbehardto
comeby,opportunitiescanstillbefoundincompanieswhosesharepriceshavebeen
beatendownduringtheoilpricecollapse.
IconOffshoreBhdandSapuraKencanaPetroleumBhdaretwocompaniesthathave
sufferedin2015duetotheirshareprices.Inasense,theirpricesalreadybottomedout
duringtheglobalstockmarketroutinAugustandhavestoppedreactingwildlytocrudeoil
pricevolatility.Theplussidehereisthatthesestocksshouldrallywhenthereisa
sustainedrecoveryinoilprices,saysLim.

Longertermrecommendationsforthesectorincludecompaniesthathavearesilientcash
flowtoweathertheweaknessincrudeoilprices.
YinsonHoldingsBhd,whichisexpectedtosecureatleastanotherfloatingproduction
storageandoffloadingcontract,andDialogGroupBhd,whichhasPetroliamNasional
BhdsRefineryandPetrochemicalIntegratedDevelopmentprojectinPengerangtoback
itsearnings,aresafelongertermoptions,saysLim.
Tansaysthedownstreamsubsegmentisalsoexpectedtoremainrobustandrelatively
insulatedfromcrudeoilpricetroubles.HisstockpicksincludePetronasChemicalsBhd,
whichhasannouncedthreepetrochemicalprojectswithinthePengerangIntegrated
PetroleumComplex,andKNMGroupBhd,whichstandstobeabeneficiaryofthesupply
ofspecialisedprocessequipment.
Forinvestorsseekingexposuretoamorepredictabledownstreamcompanyoffering
stableearnings,herecommendsGasMalaysiaBhd,astheadoptionoftheincentive
basedregulationregimewillprovidebetterearningsvisibilityandpredictability.
Addthis:[1] [1]
author:
YenNeFoo
source:
TheEdgeMalaysia
isPinningadv:
SourceURL:http://www.theedgemarkets.com/my/article/anotherroughyearlikelyog?type=Corporate
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