RHB Indonesia Morning Cuppa - 1 December 2016 - (Regional Oil & Gas, Money Supply)

Good morning,

Regional Oil & Gas: OPEC Meeting: Christmas Comes Early

OPEC members have been able to resolve their differences and have all agreed to share the burden of production cuts. Starting Jan 17, production target would be 32.5mbpd, a 1.1mbpd cut from Oct 16 level of 33.6mbpd. We had initially anticipated 33mbpd production from OPEC members, as such, our view does not change dramatically as a result of this agreement. We maintain our crude oil price forecast average of USD60/bbl for 2017F and the longer-term. OVERWEIGHT maintained on the mid-stream and downstream players, with upstream players still a momentum play.

¨ We maintain our crude oil price forecast average of USD60/bbl for 2017F and longer-term, with the markets looking to be more bullish than prior to the Organisation of Petroleum Exporting Countries (OPEC) deal. However, there is downside risk from our expectations. The monitoring and implementation of the production cuts could result in non-compliance. Shale oil producers could return at a faster pace. We are also not certain how much this deal hinges on non-OPEC joining. If the deal depends on non-OPEC joining, there are higher chances of non-compliance and the deal can fall apart. Finally, Trump’s actions could provide further challenges for the upstream sector.

¨ Our view does not change much. We view that in that any action by OPEC would be self-defeating – as any intervention would result in higher oil prices, leading to higher cost producers entering the market and lowering oil prices again. We believe that the current oil market mechanism is already working, without its intervention – low crude oil prices are needed to clear the markets by cutting production at the highest cost producers. However, this agreement will in no doubt, should it be well implemented and stretched over a longer period of time, hasten the clearing of the inventory overhang.

¨ As financial markets focus on the shorter-term outlook for oil markets, upstream E&P players are looking at the longer-term picture. Mexico would be auctioning 10 deepwater blocks. This has drawn much interest from global oil majors such as Chevron (CVX US, NR), LUKOIL (LKOD LI, NR), CNOOC (883 KH, NR) and Petroliam Nasional (Petronas). This is one of the Government of Mexico’s first steps in opening up its upstream E&P business that has long been tightly held by its national oil company (NOC), Petroleos Mexicanos (Pemex).

¨ This resonates with our view that there is some glimmer of hope as we enter 2017. We believe that any conventional field development projects that have been put on hold since the oil price collapsed should start to look into locking-in contractors over the next 12 months, in order to take advantage of the current depressed market environment: Regional Oil & Gas: Glimmer Of Hope.

¨ OVERWEIGHT mid/downstream players. Global inventory would likely remain in oversupply in 2017 in our view, thus storage providers and tankers should still benefit – MISC and Dialog Group (DLG MK, BUY, TP: MYR1.77). As we expect markets to remain volatile, we recommend AKR Corporindo, Perusahaan Gas Negara (PGAS) and Yinson as defensive plays with strong balance sheets and negative correlation to crude oil price movements. For seasonal plays where quarterly fluctuations in demand and supply influence product prices, we like Petronas Chemicals and PTT Global Chemicals (PTTGC). Upstream companies remain momentum plays – prefer larger caps: PTT Exploration and Production (PTTEP), Keppel Corp and Sembcorp Industries. (Kannika Siamwalla CFA, Norman Choong CFA, Wan Mohd Zahidi)

Link to report: OPEC Meeting: Christmas Comes Early

Link to Daily report: Indonesia Morning Cuppa - 011216

Media Highlights:

Money Supply and Loan Growth Finally Bounce Back in October

¨ Indonesia’s money supply (M2) growth edged up to 7.5% y-o-y in October, from +5.1% in September and +7.8% in August. This was due to a pick-up in net foreign operation but partly offset by a moderation in net domestic operation.

¨ At the same time, total loans growth increased, on account of faster growth in loans extended for wotking capital and investment. Deposit growth, likewise, picked-up in October, due to a rebound in demand deposit and faster increases in savings and time deposits. Going forward, we expect demand for private credit to pick up, aided by monetary policy easing and a rebound in economic growth that could induce more household spending and borrowing.

¨ Bank Indonesia (BI) board of governors’ meeting decided to maintain the BI 7-Day (Reverse) Repo rate at 4.75% on 17^thNovember 2016. Similarly, deposit facility and lending rates were maintain at 4.00% and 5.5% respectively. For the rest of the year, we expect the BI to retain its policy rate unchanged. Further out, we expect the BI to slash its key policy rate by another 25 basis points in 2017 to support economic growth under stable Indonesian rupiah (IDR) circumstances.

¨ Meanwhile, IDR continued to depreciate, mainly due to rising global financial markets uncertainties even though the selling pressure will unlikely be as severe as last year. As a whole, we expect the IDR to trade toward IDR13,200 in 2016 before weakening to 13,700 by end-2017. (Rizki Fajar)

Media Highlights:

Industries

Energy Minister issue a decree to end PLN’s monopoly

Corporates

Link Net and Bogor govt launch new TV channel

Tower Bersama recorded 43.9% YoY growth in net profit

Delta Dunia Makmur exceeds overburden removal target for FY16

Jababeka and PP Properti target 2 new projects

Jasa Marga targets IDR1.7trn net profit in FY16

Nusa Raya Cipta recorded IDR60.88bn net profit in 9M16

Our Recent Publication:

Strategy: Indonesia Strategy: Indonesia Strategy: Managing Volatility