OPEC to curtail output - DBS Research 2016-09-29: Breakthrough achieved

OPEC to curtail output - DBS Research 2016-09-29: Breakthrough achieved Oil & Gas Sector EZION HOLDINGS LIMITED 5ME.SI SEMBCORP INDUSTRIES LTD U96.SI SEMBCORP MARINE LTD S51.SI

OPEC to curtail output - Breakthrough achieved

  • OPEC members agree to reduce total output by 0.24-0.74mmbpd; details to be finalised in Nov.
  • A positive surprise that could bring forward oil equilibrium and accelerate recovery.
  • Buy E&P players to ride the oil price bounce and bottom-fish selected service providers.

A potentially game-changing move... 

  • At the unofficial OPEC meeting in Algeria yesterday, member countries reached a consensus to reduce output levels to 32.5-33.0mmbpd from 33.24mmbpd (as of August 2016), representing a 0.24- 0.74mmbpd cut. The allocation of cuts – representing the major remaining hurdle to a final decision – will be agreed upon in the next OPEC meeting on Nov 30, thus any actual production cut will come in December at the earliest.
  • Regardless, this signals OPEC’s change in strategy and willingness to resume its traditional role in propping up oil prices – at least partially, which could drastically change the dynamics of the oil sector.

…that accelerates market rebalancing and oil price recovery. 

  • The oil surplus is estimated to be c.0.3mmbpd currently. We think the rebalancing of demand and supply could possibly be brought forward from earlier expectations of end-2017 to 1H17. 
  • The first cut in output by OPEC since 2008, should help put a floor under oil prices and set the stage for a steadier oil price recovery, though a reactive spike in output from US shale players could cap the upside at around the US$60/bbl mark.

Bottom-fish selected oil & gas stocks to ride oil bounce.

  • While a rising tide lifts all boats, we prefer to stay safe before the cut is carved in stone. 
  • Upstream E&P players are the most obvious proxies to a rising oil price – we have BUYs on PTT, PTTEP and Medco Energi. CNOOC is the best proxy to the upstream sector among the Chinese oil majors.
  • Service providers could also see a rebound off their low valuation base – we have BUYs on Ezion and Bumi Armada.
  • Shipyards will likely lag the oil price recovery as they are near the bottom of the supply chain and have to grapple with lacklustre demand for newbuilds due to an oversupply of offshore assets in the market. However, we reiterate our BUY on Sembcorp Industries (SCI) as its valuation is undemanding and already implies a next-to-zero valuation for shipyard subsidiary Sembcorp Marine (SMM).

Pei Hwa Ho DBS Vickers | Suvro SARKAR DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2016-09-29
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.580 Same 0.580
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