Oil & Gas Sector - OCBC Investment 2018-05-08: Geopolitical Risk vs U.S. Shale

Oil & Gas Sector - OCBC Investment 2018-05-08: Geopolitical Risk Vs U.s. Shale Oil & Gas Stocks KEPPEL CORPORATION LIMITED SGX: BN4 SEMBCORP INDUSTRIES LTD SGX: U96 SEMBCORP MARINE LTD SGX: S51

Oil & Gas Sector - Geopolitical Risk Vs U.s. Shale

  • Iran sanctions; Iraq elections 
  • U.S. shale production continues to rise 
  • Sembcorp Marine or Keppel Corp depends on risk preference 

Trump to announce decision on Iran sanctions; Iraq parliamentary elections day

  • U.S. President Trump has said that he will announce his decision on the Iran nuclear deal this Tuesday at 2pm ET, ahead of the 12 May deadline. 
  • Recall that sanctions on Iran were lifted under a 2015 nuclear disarmament agreement. Ever since, Iran has increased its crude oil production from 3.3m bpd in Dec 2015 to 4.4m bpd in Dec 2017, according to the US Department of Energy. Should the U.S. re-impose sanctions on Iran (looks increasingly likely following the UK, France, and Germany’s support for Trump’s move to scrap the initial agreement), this could lend support to crude oil prices. However, we also note that the oil market’s base case is now already probably pricing in a Trump administration exit from the nuclear deal. 
  • On 12 May, Iraq will also be holding parliamentary elections which could have implications for the country’s energy policy. For instance, market watchers are likely to see if the ultimate winner of the elections would have any impact relating to Iraq’s cooperation with the OPEC agreement to curtail oil production. Iran and Iraq each account for about 5% of the world’s crude oil production as at Dec last year, and geopolitical events relating to them will be closely monitored by the market.

Longer term - potential upside risk in U.S. shale

  • Meanwhile, fundamentals still point to potential upside risk in U.S. shale oil production with rising oil rig counts. 2018 is also the year that U.S. oil production is expected to exceed Saudi Arabia’s. 
  • As at end-Mar 18, total crude oil production in the U.S. reached ~10.4m bpd and has continued to rise in the month of April.

Different strokes for different folks

  • Among the Singapore-listed stocks, Sembcorp Marine [Rating: HOLD, Fair Value Estimate: S$2.10] is more sensitive to oil price movements though investors are advised to be nimble. 
  • As mentioned in our earlier report on 26 Apr 18, “Sembcorp Marine: Buoyed by scarcity premium”, the stock is the only large cap oil and gas pure play in the Singapore space and hence a likely favourite for investors wishing to gain exposure to rising oil prices. However, on a fundamental basis, its forecasted ROE for this year and next are unable to justify higher P/B valuations (please refer to full report for more details). 
  • Meanwhile, we prefer Keppel Corporation [Rating: BUY; Fair Value Estimate: S$9.40] due to its diversified earnings base and less demanding valuations.

Low Pei Han CFA OCBC Investment | https://www.iocbc.com/ 2018-05-08
SGX Stock Analyst Report BUY Maintain BUY 9.400 Same 9.400
BUY Maintain BUY 3.590 Same 3.590
HOLD Maintain HOLD 2.100 Same 2.100