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Friday, March 25, 2016

Oil & Gas - Navigating the new O&G landscape



Highlights
  • 2016 OTC Asia event. Yesterday, we attended the forum led by MIDA discussing the Malaysian O&G industry. The event, hosted by Y. Bhg. Datuk N. Rejendran (MIDA Deputy CEO, was joined by several speakers namely: Mr. Adif Zulkifli (SVP of Petronas Corporate Strategy), Mr. Maen Razouqi (Schlumberger VP & GM), Mr. Douglas Bruce Moody II (FMC GM) and Mr. Craig McMahon (Wood Mckenzie Asia Pacific Head of Research).
  • Readjustment to the new norm. In essence, most of the major players in the industry have accepted the new norm of low oil prices whereby exuberance is no longer tolerable and are taking multiple initiatives to optimize their cost structures. Petronas has launched Coral 2.0 initiative to save costs and improve efficiencies. Schlumberger, on the other hand, has looked at further optimization in its business involving reduction of Non Performing Time (NPT) through widening scope of work on per staff basis. This is in line with staff cuts, margin shrinkage and lower vessel demand observed in the overall market as oilfield operators look to be leaner in their operations.
  • More company consolidation needed? Calls for further consolidation in the O&G industry are echoed again by Petronas. To put it into perspective, there are 3000+ O&G companies registered in Malaysia while Norway, with similar production volume, has only 700+ registered companies, pointing to ample room for companies in Malaysia to consolidate. The question is whether consolidation will happen in Malaysian O&G industry in a big way. In our opinion, it is not expected to crystallize in a large scale as majority of the local market is controlled by 100+ players whereby the remaining companies consist of one-asset players or licensed shipbrokers, unattractive for a takeover especially in the current downturn.
  • Oil long-term fundamentals still intact. Wood Mckenzie is of the view that oil demand and supply picture would improve in the long run despite near term hiccups due to oversupply. From 2015 to 2025, the estimated shortfall of oil supply needed to cater for the growth in oil demand is expected to be at 9m bbls a day and significant oil inventory drawdown is expected in 2017. This is broadly in line with our view that oil prices are expected to be capped in the near term due to high oil inventory and resiliency of US shale oil production. More upside could only be seen in the longer term as the demand and supply gap narrows. NEUTRAL.

Positives

  • : Signs of oil prices bottoming giving further stability in the sector.

Negatives
  • : Sharp rally in oil price could bring back the extra barrels of oil

Valuation
  • Top pick: Mid to Small cap: KNM (RAPID exposure)




Source: Hong Leong Investment Bank Research, 25 March 2016

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