UOB Kay Hian 2015-08-04: Sector Update - Offshore & Marine. Brent To Test 2015 Lows On Iran’s And IEA’s Lower Demand Growth Outlook.

Brent To Test 2015 Lows On Iran’s And IEA’s Lower Demand Growth Outlook 


  • Our Brent oil price estimate remains unchanged for 2015 and 2016 at US$61/bbl and US$72/bbl respectively. 
  • Oil price tumbled 16% for the month on market shocks, Iran and continued oversupply. 
  • Iran’s impact on supply is likely only to be seen in 1Q16, and is estimated at 0.8mb/d. 
  • EIA forecasts US supply to decline 0.2mb/d as IEA has lowered demand growth from 1.4mb/d to 1.2mb/d, which implies continued oversupply in 2016. 
  • Our top picks remain SCI, Ezion Holdings and Triyards. 
  • Maintain MARKET WEIGHT. 


 Maintain Brent oil price estimates for 2015 and 2016 at US$61/bbl and US$72/bbl respectively. 

  • Average Brent crude estimates fell by 0.9-1.3% for the month as the 38 institutions we track revised their estimates downwards. 
  • Average Brent crude price forecasts for 2015 fell 0.9% from US$61.37 to US$60.81, while 2016 forecasts fell 1.3% from US$72.18 to US$71.26. 
  • The EIA has revised its 2015 Brent forecasts down by 0.5% from US$60.53 to US$60.22, but maintained its 2016 forecast of US$67.04. 
  • As the declines were less than our tolerance of 5%, we maintain our estimates for 2015 and 2016. 

 Oil price down 15.8% mom on market shocks, Iran and oil oversupply. 

  • Brent fell 15.8% mom on the back of market events from China and Greece, Iran’s nuclear agreement and the continued oversupply situation. 
  • The benchmark is now down 23% from its 2015 high of US$67.77. 
  • The market rout on the Shanghai Composite index, coupled with “Grexit” fear jitters saw Brent plunge by 6.3% on the event. 
  • Iran’s nuclear deal with the US resulted in another wave of selling, sending the benchmark down 2.5% on the news. 
  • Fears of a crude glut being converted into a refined product glut also added to downward pressure for the month. 
  • Despite it being the peak demand season, refined distillates saw a net increase of 8.2m bbl (+6.1%), vs a 5.7m bbl (-1.2%) drawdown in crude inventories. 

 Iran sanction relief earliest by 1Q16. 

  • Sanction relief, on paper, can only start by early 2016 at the earliest. 
  • The deal requires approval from Congress, a process that will take up to 60 days from 15 July, with an additional 22 days if the president has to veto a rejection from Congress. 
  • Even if approved, sanctions will not be lifted until the International Atomic Energy Agency (IAEA) reports Iran’s compliance of its nuclear-related commitments. 
  • Experts estimate implementation of the deal to take 4-12 months from a start date in end October, making the earliest lifting of sanctions 1Q16. 

 Iran export volumes to potentially rise by 0.8mb/d. 

  • Iran could potentially add an additional 0.8mb/d by mid-16, based on its spare production capacity. 
  • According to IEA, Iran’s sustainable crude production capacity was 3.6mb/d, with spare production capacity estimated at 0.8mb/d as of Jun 15. 
  • Additional production is likely to come on-stream progressively, and reach pre-sanction levels of 4.5mb/d by 2020. 
  • In the near term, exports will likely exceed current levels of 1.3mb/d as the country clears approximately 40m bbl of oil in floating storages. Long-term wise, expectations are for export volumes to be about 2.0mb/d. 

 US oil production to decline 2.1% by 2016. 

  • The US Energy Information Administration (EIA) in its latest report estimated that US crude oil production peaked at 9.6mb/d in April, before declining by 50kb/d in May. 
  • Overall, EIA expects oil production to decline from 9.5mb/d in 2015 to an average of 9.3mb/d in 2016. A large part of this decline is attributable to shale oil production, which fell from a 2015 high of 5.69mb/d to 5.45mb/d currently. 
  • The production decline is expected to accelerate from 50-60kb/d (Apr to Jun) to 80-90kb/d (Jul to Aug) as the low oil prices make projects economically unattractive. 

 July supply imbalance widened to 3.3mb/d. 

  • The supply imbalance in July widened to 3.3mb/d as supply grew 550kb/d from 96.0mb/d to 96.6mb/d, while demand remained relatively unchanged at 93.3mb/d. 
  • According to IEA, 2016 oil demand growth is expected to ease from 1.4mb/d in 2015 to 1.2mb/d in 2016, with non-OPEC supply growth flat yoy. 
  • This implies demand/supply of 94.0mb/d / 96.3mb/d in 2015 and 95.2mb/d / 96.6mb/d in 2016 (see chart “EIA Demand/Supply Balance” on the right), and the supply imbalance to narrow from 2.3mb/d to 1.4mb/d correspondingly. 
  • We estimate IEA’s supply forecast by basing OPEC’s production at current levels, which rose 0.4mb/d from 31.3mb/d in May to 31.7mb/d in end-June. 


ACTION 


 Maintain MARKET WEIGHT. 

  • We retain our stock recommendations and maintain MARKET WEIGHT on the sector. 
  • The global O&G industry faces poor earnings visibility as capex and operating costs are being cut. An austerity drive now permeates the entire industry - among oil companies, service providers and shipyards. 
  • 4Q14 and 1Q15 saw a fall off the cliff. 
  • While activities are returning, oilfield services companies are expected to post poor earnings performance for 2Q15. 
  • A meaningful recovery might be seen only in 1H16. In the meantime, stock prices of mid- and small-cap oil service stocks have fallen close to cyclical trough valuations of 0.5x. 
  • Our top stock picks in the Singapore offshore & marine (O&M) sector remain Sembcorp Industries (SCI), Ezion and Triyards. 


ASSUMPTION CHANGES / CATALYSTS / RISKS 


 Oil price the key risk. 

  • Two key risks in the sector are: 
    1. another fall in oil prices and, 
    2. protracted low oil prices. 
  • Both would significantly impede future capex spending, which needs to rise in order to return activity levels to post-crash levels.



Analyst: Nancy Wei; Foo Zhiwei

Source: http://research.uobkayhian.com/


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