CONTINUOUS news flow of vaccine developments is supporting themes of border re-opening and easing lockdowns, thus theoretically supporting an oil demand recovery though this is weighed down by new waves of COVID-19 infections.
Moreover, the decision by OPEC+ in end-November whether to extend or deepen the current output cuts coupled with ongoing crude stock draws are expected to be positive for oil prices, according to UOB Kay Hian Research.
“These factors may result in oil prices running ahead of consensus expectations of US$47/bbl and US$50/bbl for 1H CY2021 and 2H CY2021 respectively,” projected analyst Kong Ho Meng in a sector update.
For the record, the US Energy Information Administration has just reduced its 2021 forecast to US$46.60/bbl while the research house’s base case oil price assumption is more conservative at US$40/bbl.
Despite some companies guiding for a quarter-on-quarter (qoq) recovery in 3Q CY2020, channel checks by UOB Kay Hian Research suggests that local upstream activities continued to be lacklustre, hence downside risk abounds for 3Q CY2020 sector earnings.
“First, the active local rig count in 3Q CY2020 appears to be similar or slightly worse qoq,” observed Kong. “Second, deferrals of some non-essential works have been intensified, likely to 2021, in view of Petronas’ ongoing cost cuts.”
UOB Kay Hian holds the view that Petronas has been slow to cut costs as it continues to face multiple challenges despite having an ample cash buffer of RM168 bil (helped by the recent US$6 bil bond proceeds).
“Hence, contract deferrals remain as a key impact to the earnings outlook for the sector,” noted Kong.
All-in, UOB Kay Hian Research maintained “market weight” with upside trading bias on the oil & gas sector with Serba Dinamik Holdings Bhd as its top pick.
“We continue to base our sector valuations on US$40/bbl oil price which factors in a recovery in oil demand,” justified the research house.
“We still advise against purely investing based on oil price momentum, and avoid stocks that are dependent on Petronas’ local contracts.” – Nov 12, 2020
