HARD to believe as it maybe, global oil prices have risen by more than 70% over the past 12 months – from circa US$40/barrel in mid-June 2020 to above US$70/bbl in recent times – due to optimism over the easing of COVID-19 restrictions for some of the world’s largest economies.
Together with aggressive output cuts from the OPEC+ alliance which has led to faster drawdowns of global oil inventories, the muted response thus far by the shale producers could have also led to higher prices, according to PublicInvest Research.
“Based on the sector dynamics currently, we expect oil prices to average around US$70-US$75/barrel for this year,” projected analyst Nurzulaikha Azali in an oil & gas (O&G) sector update.
“Given this price, we believe it is attractive enough for the oil majors to increase spending, in line with progressive global economic recovery and reduction in COVID-19 cases, hence more significant work orders available in the market.”
Such outlook augurs well for domestic O&G service providers although the ongoing movement control order (MCO 3.0) could probably pose some near-term challenges in terms of project execution.
“We foresee oil majors’ spending should pick-up from 2H 2022 onwards with more significant work orders available in the market,” opined PublicInvest Research.
“This will be positive to O&G service providers though the MCO 3.0 could probably pose some near-term challenges in terms of project execution.”
For sector exposure, the research house prefers Hibiscus Petroleum Bhd in light of favourable crude oil prices, and for it being a direct proxy, providing greater earnings visibility. Moreover, the company’s earnings will also be boosted by its newly acquired assets from Repsol.
As for service providers, PublicInvest Research likes Dayang Enterprise Bhd and Uzma Bhd given that both are brownfield specialists which will benefit directly from the rise in brownfield activities (maintenance and production enhancement), as well as increased spending by the oil majors going forward.
All-in-all, the research house maintained its “overweight” stance on the sector.
“The current global oil demand and supply outlook bodes well for oil prices with expectation that prices could potentially jump to US$80/barrel,” reckoned PublicInvest Research.
“Nevertheless, we believe the rally could be short-lived as this will prompt oil majors particularly from OPEC countries to pump more oil given the current-low production and breakeven cost in comparison to US shale producers.” – July 6, 2021
