MIDF Research believes that a de-escalation of the US-Iran tensions will lead to more sustainable oil price movements and a more stable outlook for the oil and gas industry.
Analyst Noor Athila Mohd Razali in her note says the situation is unlikely to escalate further, citing the fact that any tensions surrounding the Middle East will disrupt world trade and oil supply, with members of the Organisation of Petroleum Exporting Countries (Opec) having stated that they are vulnerable to regional conflicts.
The expectation remains that oil will trade between US$60 and US$65 per barrel, with an average of US$65 per barrel this year.
Athila also notes that Opec countries have taken measures to reduce the impact of regional tensions, including rerouting oil tankers away from the Strait of Hormuz, adding armed security guards on oil tankers, reviewing evacuation plans, and orchestrating orderly shutdowns of offshore facilities, should the need arise.
“Additionally, the deeper production cuts – from 1.2mbpd to 1.7mbpd, agreed in the recent Opec meeting on Dec 6, 2019, will assist in mitigating the volatility of the going price for oil,” she says.
Also mentioned was that the impending debt maturity of US oil and gas companies will continue applying downward pressure on oil prices.
“According to Moody’s Investor Service, an estimated US$200 bil worth of debt racked up by North American oil and gas companies since 2015 is expected to mature within the next four years. The first tranche of debt worth US$40 bil is due in 2020,” adds Athila.
As such, she opines that a stable and sustainable oil price will be even more favourable to oil and gas companies in the current operating climate, which would enable the proper planning of future capital expenditure.
“That said, we understand that most exploration and production (E&P) producers are comfortable at the current US$60 to US$70 per barrel oil price level as current production cost ranges from US$30 to US$40 per barrel for offshore production. For onshore production, the cost is even lower, which will ensure that the current upbeat momentum of offshore and onshore activities will be sustained,” says Athila.
MIDF Research reiterates its view that local oil and gas companies involved in drilling, fabrication, and vessel provision will continue to benefit from the upbeat offshore activities planned for this year.
In the upstream segment, where a neutral recommendation is maintained, MIDF Research is bullish on Dayang Enterprise Bhd, Bumi Armada Bhd, and Dialog Group Bhd. In the downstream segment, where a positive recommendation is maintained, the research house prefers Petronas Chemicals Group Bhd, Petronas Dagangan Bhd, and Gas Malaysia Bhd, on the back of robust demand for downstream products and that “the external disruptions are temporary in nature.” – Jan 10, 2020
