Sector
News Flash:
Regional Oil & Gas (Overweight),
Keep Calm And Think Rationally
Regional Oil & Gas (Overweight),
Keep Calm And Think Rationally
The
main concern now after Britain’s vote to leave the EU, is the impact of Brexit on
the fragile global economy, which in turn can have a negative impact on the
healthy oil demand. Crude oil prices fell by 4.9% to USD48.41/bbl, which
remains within our forecasted range of USD45-55/bbl for 2H16. We recommend
large-cap O&G stocks in the midstream and downstream. Top Picks: Thai Oil
and Perusahaan Gas Negara (PGN).
♦ Oil demand may
falter. The
immediate concern is be the impact of Brexit on the fragile global economy as:
i. A weaker European economy may hurt
Chinese exports (thus weakening China’s economy further),
ii. A stronger USD could lead to downward
pressure on global currencies.
This
scenario would most likely have a negative impact on oil markets and the robust
demand which we have been experiencing may falter.
♦
Crude
oil prices fell by 4.9% to USD48.41/barrel (bbl) on Friday, however, this is
still within our forecasted trading range of USD45-55/bbl for the rest of this
year. The crude oil price YTD average was USD39.97/bbl (Brent spot), with our
full-year forecast at USD45.5/bbl. We maintain our forecasts.
♦ Britain by itself is
small, in
terms of oil demand. It accounted for 1.6% (or 1.5 million barrels per day
(mbpd)) of 2015 world oil demand. As such, the absolute impact of Brexit on the
global oil demand picture seems to be limited; instead we believe the Asia
Pacific region would fuel global demand growth in the foreseeable future. In
the last two major financial crises of 2008 and 1997, only in 2008 there was
registered an absolute decline in global oil demand. Therefore, it remains
uncertain at this point if a global economic slowdown will lead to an absolute
fall in global oil demand. However, it is the uncertainty of the Brexit’s
effect on the global economy that will weigh in on the risk and asset prices
going forward.
♦ We recommend large-cap O&G stocks that are in the mid-stream and downstream segments, as we believe their core earnings would remain relatively intact over the next several quarters. We remain fundamentally bearish on the upstream players, although this is highly correlated to crude oil prices. Our Top Picks for 2H16 are Thai Oil (TOP TB, BUY, TP THB74.84), PTT Global Chemical (PTTGC) (PTTGC TB, BUY, TP THB70.87) and Perusahaan Gas Negara (PGN) (PGAS IJ, BUY, TP: IDR3,500). A major risk is the global economy may slow down more than expected, affecting overall demand and pushing out the rebalancing of the oil market.
♦ We recommend large-cap O&G stocks that are in the mid-stream and downstream segments, as we believe their core earnings would remain relatively intact over the next several quarters. We remain fundamentally bearish on the upstream players, although this is highly correlated to crude oil prices. Our Top Picks for 2H16 are Thai Oil (TOP TB, BUY, TP THB74.84), PTT Global Chemical (PTTGC) (PTTGC TB, BUY, TP THB70.87) and Perusahaan Gas Negara (PGN) (PGAS IJ, BUY, TP: IDR3,500). A major risk is the global economy may slow down more than expected, affecting overall demand and pushing out the rebalancing of the oil market.
Best
regards,
Kannika Siamwalla,
CFA
Head of Regional Oil
& Gas
RHB Securities
(Thailand) PCL.
