Oil & Gas Sector
Maintain “neutral”: The Organization of the Petroleum Exporting Countries (Opec) seems ineffective in controlling its members’ output and trying to keep prices high could be dangerous for it now, as this may result in further technological innovations in the industry. The oil surplus is expected to be at around 1.13 million barrels per day in 2015, but supply may decrease if prices remain weak.

A new era has come, with shale oil producers being the new global market swing producer. As such, we expect a shorter boom-bust cycle going forward.

We have revised our base-case 2015 forecast price of crude oil to US$80 (RM280) per barrel (bbl), while our long-term price remains at US$95 bbl. We performed a sensitivity analysis for a worst-case scenario, in which the price of crude oil is at US$40 bbl within our regional coverage.

In this scenario, the price of crude oil staying at this rate over a prolonged period of time would most affect the companies involved in upstream exploration and production, refineries and petrochemical players.

These companies are PTT Exploration and Production (“buy”, target price (TP): 142.61 baht [RM15.10]); Bangchak Petroleum (“neutral”, TP: 29.52 baht); IRPC (“sell”, TP: 3.17 baht); Thai Oil (“buy”, TP: 48.04 baht); PTT Global Chemical (“buy”, TP: 64.34 baht); and PTT (“buy”, TP: 357 baht) whose earnings would plunge 50% from the base case.

For the service providers, we assume that some uncontracted assets may remain idle for an extended period of time (12 to 24 months). The negative impact on these firms’ earnings per share may be 10% to 60% lower than their base case scenarios.

However, our scenario analysis is based on the assumption that all other variables remain constant, unless otherwise stated. Note that companies usually adjust their operations to mitigate worst-case scenarios.

We remain positive as the bulk of the companies under our Asean oil & gas coverage universe are in the services segment and would be relatively unaffected by short-term crude oil price volatilities. This is because these players have short- to medium-term service contracts.

For our selected companies under coverage, the weak crude oil prices would not have any material impact on earnings over the next 12 to 24 months. They are PTT, Dialog (“buy”, TP: RM2.00), Perdana Petroleum (“buy”, TP: RM1.62), Ezion (“buy”, TP: S$2.65 [RM7.09]) and Nam Cheong (“buy”, TP: S$0.61) — RHB Research, Dec 16

This article first appeared in The Edge Financial Daily, on December 18, 2014.