Regional Oil & Gas - DBS Research 2019-02-27: Trump Tweets Again

SEMBCORP INDUSTRIES LTD (SGX:U96) SEMBCORP MARINE LTD (SGX:S51)

Regional Oil & Gas - Trump Tweets Again

President Donald Trump gets trigger happy and tweets about crude oil prices being too high again.
Oil prices have recovered by 28% since bottoming on Christmas Eve, driving outperformance of Oil Majors.
Supply concerns may resurface if OPEC production cuts are jeopardised by Saudi Arabia heeding Trump’s call, as downsized Iran sanction waivers are likely to be permitted.
Expect sustained volatility in crude oil prices, shift focus to oilfield services, as capex recovery takes form.

Brent crude oil price plunged 3.5% to close at US$64.76/bbl last night as Trump tweeted OPEC that “oil price is getting too high”.
Trump has not tweeted about OPEC since early December. His tweet sparks concerns that OPEC, in particular Saudi Arabia, might be pressurised to throttle production cuts. This would likely derail the entire OPEC+ coalition agreement, given Saudi Arabia is currently doing most of the heavy lifting.
While we believe OPEC will stand firm on their production cut stance, Trump’s previous tweets had negative effects on short-term oil price sentiment, leading to weakness in O&G stocks.

We do not expect Saudi Arabia to be swayed by Trump and expect the OPEC leader to maintain its course for accelerated production cuts.
Surprise sanctions on Venezuela, which should see an additional unplanned production cut of around 0.2mmbpd, and extension of slimmer Iran sanction waivers will help counterbalance potential supply growth from shale regions in the US in 2019.
Demand-side concerns may see temporary relief from an increasingly positive tone on the trade war front, but lingering economic growth and other geopolitical risks will remain a drag.

We expect profit-taking to weigh on E&P companies, which are seen as proxies to oil price performance, in the event of weaker near-term oil price sentiment after a solid rally of 15-35% in 2019 YTD.
Fundamentally, we prefer service providers which are on the cusp of recovery with relatively more attractive valuations. We continue to like Anton Oil, SEMBCORP MARINE LTD (SGX:S51) and Serba Dinamik, as an uplift in global upstream capital spending and for oilfield services.

President Donald Trump protests against crude oil prices on Tweeter again, sending Brent crude oil prices plummeting by 3.5% to around US$64.76. Trump has been a prolific Tweeter about OPEC and crude oil prices, and often relies on the social media platform to influence production decisions of the coalition.
Over the course of the past 14 months, Trump has vented his frustration on Twitter on 10 different occasions, often with varying degrees of success. This changed after Trump sided with the Crown Prince of Saudi Arabia over the murder of Khashoggi, as it led markets to believe that Saudi Arabia would do Trump’s bidding to sustain his political support.

As a recap, the OPEC+ alliance agreed to cut 1.2mmbpd from the market, starting January after oil prices plunged by more than 40% in the final quarter of 2018. Saudi Arabia’s commitment was commendable, cutting production by significantly more than its pledged amount. The same cannot be said for the rest of the coalition, as a mere nine out of the 20 other nations met their targets in January. This means that the coalition’s consolidated efforts would be severely undermined if Saudi Arabia decides to ease production cuts to appease Trump.
However, we do not foresee Saudi Arabia bending to Trump’s will again, despite continued pressure from the latter. Saudi Arabia proceeded with production cuts, knowing it could well incur Trump’s wrath, because it was necessary to balance oil markets and prevent them from spiraling out of control.
It is important to remember that while Saudi Arabia has one of the lowest breakeven crude oil prices in the world, the country still requires crude oil prices to be at around US$73/bbl in 2019 to balance its fiscal budgets, according to the IMF. Furthermore, tension surrounding the entire Khashoggi episode still exists, but appears to be under control for now. Hence, we expect to see more tweets from the Chief-in-Command in the near future, who is an avid supporter of low oil prices.

The effects of fresh sanctions on Venezuela, which is expected to shed the country’s production by 0.2mmbpd, and probable extensions of Iran sanction waivers have yet to be fully digested by the market. Meanwhile, OPEC+ compliance with production cuts is lacklustre, with Russia likely to take its time, and US shale production could tilt the market into oversupply again, as capacity constraints in the Permian alleviate.
On the demand side, while the recent delay in tariffs is a positive, concerns will still persist until both countries come to a more comprehensive resolution. Additionally, dark clouds continue to loom over the world economy.

We reiterate our view on protracted oil price volatility and expect profit-taking pressure on E&P players. Oil prices have recovered by about 20% in 2019 YTD, driving the outperformance of upstream players. In the near term, we believe geopolitical factors will weigh on the E&P sector and recommend shifting allocation to oilfield service providers, which are at an inflection point, driven by an uplift in global capital spending.
Recommend BUY on Anton Oilfield, SEMBCORP MARINE LTD (SGX:S51) and Serba Dinamik.

Pei Hwa HO DBS Group Research | https://www.dbsvickers.com/ 2019-02-27

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