Global energy equity and oil & gas macro analyst

Anish Kapadia

Akap Energy

Thematic (Sector/Industry)

Our analysis shows that there are an unbelievable 25+ LNG developers that have stated (within the last year) they will take a final investment decision (FID) on their LNG liquefaction plants in 2019. Unless demand surprises to the upside, the expected LNG supply deficit in the mid-2020s could easily turn into a glut. In total there is almost 250 million tonnes per annum (mtpa) of capacity that plans to take FID this year - the equivalent of 80% of current global supply. In total there are ~US$180bn of contracts up for grabs - it should be a bumper year for the oil service (E&amp;C) companies.  This should be positive for the LNG contractors such as <a href="https://www.smartkarma.com/entities/17524" target="_blank" data-smartkarma-citation="entities:17524:1">Mcdermott Intl (MDR US)</a>, <a href="https://www.smartkarma.com/entities/27505" target="_blank" data-smartkarma-citation="entities:27505:1">TechnipFMC PLC (FTI FP)</a>, <a href="https://www.smartkarma.com/entities/6232" target="_blank" data-smartkarma-citation="entities:6232:1">Chiyoda Corp (6366 JP)</a> and <a href="https://www.smartkarma.com/entities/19335" target="_blank" data-smartkarma-citation="entities:19335:1">Jgc Corp (1963 JP)</a> .
<div class="content-highlight">
Exxon Q4'18 conference call, "While we see a lot of high growth opportunities in LNG, capacity will come on in big chunks. It won't be necessarily coordinated, so we'll see, I suspect, periods of oversupply."
</div>

Our analysis shows that there are an unbelievable 25+ LNG developers that have stated (within the last year) they will take a final investment decision (FID) on their LNG liquefaction plants in 2019. Unless demand surprises to the upside, the expected LNG supply deficit in the mid-2020s could easily turn into a glut. In total there is almost 250 million tonnes per annum (mtpa) of capacity that plans to take FID this year - the equivalent of 80% of current global supply. In total there are ~US$180bn of contracts up for grabs - it should be a bumper year for the oil service (E&amp;C) companies.  This should be positive for the LNG contractors such as Mcdermott Intl (MDR US), TechnipFMC PLC (FTI FP), Chiyoda Corp (6366 JP) and Jgc Corp (1963 JP) .

Exxon Q4'18 conference call, "While we see a lot of high growth opportunities in LNG, capacity will come on in big chunks. It won't be necessarily coordinated, so we'll see, I suspect, periods of oversupply."


A Huge Wave of New LNG Projects Coming in the Next 18 Months: Positive for The E&C Companies

Equity Bottom-Up

A number of the largest oil companies in the U.S. and Europe reported results last week including <a href="https://www.smartkarma.com/entities/811" target="_blank" data-smartkarma-citation="entities:811:1">Exxon Mobil (XOM US)</a> , <a href="https://www.smartkarma.com/entities/11091" target="_blank" data-smartkarma-citation="entities:11091:1">Chevron Corp (CVX US)</a> and <a href="https://www.smartkarma.com/entities/22108" target="_blank" data-smartkarma-citation="entities:22108:1">Royal Dutch Shell (RDSA LN)</a>, all showing strong share price performance on the back of their results and outlook statements.We look at the main topics of interest that came out of the results so far and what this means for the oil and gas sector. The areas in focus were the strong cash flow generation and capex plans, reserve replacement, new LNG projects, IMO impact for the refining sector and digitalisation. The upstream areas that got the most focus were the US onshore (specifically the Permian), US Gulf of Mexico, Guyana, Brazil and Venezuela. This follows on from our note <a href="https://www.smartkarma.com/insights/2019-energy-market-themes-stocks-with-exposure-focus-on-oil-refining-lng-m-a-renewables" target="_blank" data-smartkarma-citation="insights:27522">2019 Energy Market Themes &amp; Stocks with Exposure: Focus on Oil, Refining, LNG, M&amp;A &amp; Renewables</a>.

A number of the largest oil companies in the U.S. and Europe reported results last week including Exxon Mobil (XOM US) , Chevron Corp (CVX US) and Royal Dutch Shell (RDSA LN), all showing strong share price performance on the back of their results and outlook statements.We look at the main topics of interest that came out of the results so far and what this means for the oil and gas sector. The areas in focus were the strong cash flow generation and capex plans, reserve replacement, new LNG projects, IMO impact for the refining sector and digitalisation. The upstream areas that got the most focus were the US onshore (specifically the Permian), US Gulf of Mexico, Guyana, Brazil and Venezuela. This follows on from our note 2019 Energy Market Themes &amp; Stocks with Exposure: Focus on Oil, Refining, LNG, M&amp;A &amp; Renewables.

Oil Majors Results: The Main Take-Aways. We Are Positive on Hess, Valero and Chevron

'Quantamental' Japan Specialist, LightStream Research

Campbell Gunn

'Quantamental' Japan Specialist

ja research

ja research is an independent research platform focused exclusively on Japanese equities. Leveraging data and graphic analysis provided by Japan Analytics, we provide insights on small and medium-sized companies that have been ignored by the sell-side as well as challenging conventional wisdom on larger companies. We also offer analyst and corporate access, the latter with translation if required. 

Quantitative Analysis

<div class="content-caption">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/076/722/original/2019-01-26_16-21-53.png?1548487323" class="editor-image img-responsive" data-smartkarma-image-id="76722"></figure>

Source: Japan Analytics
</div>
CONSISTENCY PAYS - In troubled markets, investors often seek out companies with greater earnings stability and a history of consistent stock outperformance. Conversely, companies that offer investors more of a rollercoaster ride (<a href="https://www.smartkarma.com/entities/6232" target="_blank" data-smartkarma-citation="entities:6232:1">Chiyoda Corp (6366 JP)</a> being an excellent recent example) are less rewarding, especially when adjusted for volatility. In an attempt to sort the 'Steady Eddies' from the Rollercoaster Rides', we have created a Consistency Score - a composite based on our Results Score, Forecast/Revision Score, Relative Price Score and Volume Score - which measures the variability, consistency, correlation, and range of each of these scores for every company.  Cap-weighted aggregate Consistency Scores are then derived for 321 Peer Groups and 29 Sectors - REITs are excluded from this analysis. Over 3 million data points have been reviewed in creating this analysis. As the old slogan goes - "we do the work, so you don't have to'.
'CARP = CONSISTENCY-AT-A-REASONABLE-PRICE' - Our findings will not surprise long-term investors in Japanese equities; the simple asset allocation decision to prefer domestic growth over global value has determined the quartile-ranking of many strategies in recent years. Although many of these Sectors, Peer Groups and stocks are now overvalued, we do not expect the underlying business dynamics to change in the years ahead and many excellent investment opportunities remain, especially down the cap-scale. Periodic and often substantial mean reversions in the more cyclical sectors, such as the one that has occurred in the last two days, will offer attractive trading opportunities for more-nimble portfolio managers. Longer-term orientated investors are better-advised to continue to favour 'consistency-at-a-reasonable-price'.  Some of our 'findings', as explained in more DETAIL below, are as follows: - 
<ul class="">
<li>
SECTORS - The better investors in Japan over the last two decades have eschewed traditional manufacturing in favour of Services, IT/Internet, Retail, Restaurants and 'FB&amp;T'. Only Machinery and Electrical Equipment outperformed the market's 4% compound annual growth rate (CAGR) over the period.</li>
<li>
PEER GROUPS- The most-consistent Peer Groups are found in industries associated with food, drugs, welfare, shelter and amusement. Only five of the top-forty Peer Groups - Online Payment Services, E-Commerce, IT System Services, Telecom Distribution Services and Internet Software &amp; Services belong to the 'new age'. There are no manufacturing Peer Groups in the top-forty. The best performing Peer Group is Securities Services, and the worst-performing is Investment Management &amp; Advice. Although both have similar levels of consistency, the stock exchange has beaten its fund managers by 28% annually since 2005.</li>
<li>
COMPANIES - The simple average fourteen-year compound annual share price appreciation for all listed large-cap companies is +5.1%. For all listed companies the average falls to just +0.5%, highlighting the perils of investing in Japan's small caps. The average share price CAGR for our hindsight-selected top-forty is +18.7%. In contrast, only one of our forty least-consistent companies outperformed the market and the average for the least-consistent forty companies was a negative -3.2%.   Unsurprisingly, there are eight banks and six steel companies on the list, along with two glass companies and two shipping lines.</li>
<li>
CONSISTENCY HALL OF FAME/SHAME AWARDS - We have selected one company from each of the most and least consistent lists as the winner of a 'Consistency Award'. Both are highlighted in the chart above. One of them will be as surprising to many readers as it was to us.  </li>
</ul>




Source: Japan Analytics

CONSISTENCY PAYS - In troubled markets, investors often seek out companies with greater earnings stability and a history of consistent stock outperformance. Conversely, companies that offer investors more of a rollercoaster ride (Chiyoda Corp (6366 JP) being an excellent recent example) are less rewarding, especially when adjusted for volatility. In an attempt to sort the 'Steady Eddies' from the Rollercoaster Rides', we have created a Consistency Score - a composite based on our Results Score, Forecast/Revision Score, Relative Price Score and Volume Score - which measures the variability, consistency, correlation, and range of each of these scores for every company.  Cap-weighted aggregate Consistency Scores are then derived for 321 Peer Groups and 29 Sectors - REITs are excluded from this analysis. Over 3 million data points have been reviewed in creating this analysis. As the old slogan goes - "we do the work, so you don't have to'.
'CARP = CONSISTENCY-AT-A-REASONABLE-PRICE' - Our findings will not surprise long-term investors in Japanese equities; the simple asset allocation decision to prefer domestic growth over global value has determined the quartile-ranking of many strategies in recent years. Although many of these Sectors, Peer Groups and stocks are now overvalued, we do not expect the underlying business dynamics to change in the years ahead and many excellent investment opportunities remain, especially down the cap-scale. Periodic and often substantial mean reversions in the more cyclical sectors, such as the one that has occurred in the last two days, will offer attractive trading opportunities for more-nimble portfolio managers. Longer-term orientated investors are better-advised to continue to favour 'consistency-at-a-reasonable-price'.  Some of our 'findings', as explained in more DETAIL below, are as follows: - 


SECTORS - The better investors in Japan over the last two decades have eschewed traditional manufacturing in favour of Services, IT/Internet, Retail, Restaurants and 'FB&amp;T'. Only Machinery and Electrical Equipment outperformed the market's 4% compound annual growth rate (CAGR) over the period.

PEER GROUPS- The most-consistent Peer Groups are found in industries associated with food, drugs, welfare, shelter and amusement. Only five of the top-forty Peer Groups - Online Payment Services, E-Commerce, IT System Services, Telecom Distribution Services and Internet Software &amp; Services belong to the 'new age'. There are no manufacturing Peer Groups in the top-forty. The best performing Peer Group is Securities Services, and the worst-performing is Investment Management &amp; Advice. Although both have similar levels of consistency, the stock exchange has beaten its fund managers by 28% annually since 2005.

COMPANIES - The simple average fourteen-year compound annual share price appreciation for all listed large-cap companies is +5.1%. For all listed companies the average falls to just +0.5%, highlighting the perils of investing in Japan's small caps. The average share price CAGR for our hindsight-selected top-forty is +18.7%. In contrast, only one of our forty least-consistent companies outperformed the market and the average for the least-consistent forty companies was a negative -3.2%.   Unsurprisingly, there are eight banks and six steel companies on the list, along with two glass companies and two shipping lines.

CONSISTENCY HALL OF FAME/SHAME AWARDS - We have selected one company from each of the most and least consistent lists as the winner of a 'Consistency Award'. Both are highlighted in the chart above. One of them will be as surprising to many readers as it was to us.  


Japan: Consistency Scores - Steady Eddies V. Rollercoaster Rides

<div class="content-highlight">
<h2>We run through our views on the main themes that will impact the oil and gas market in 2019 and the stocks to play these through. We outline the 10 key themes including oil demand, US oil supply growth, OPEC+ policy, base production decline rates, exploration potential and the outlook for new project final investment decisions. We also look at the refining market, LNG supply and demand, the M&amp;A prospects and the impact of the energy transition. We outline 12 stocks (7 bullish and 5 bearish calls) that we think you can play the themes through.</h2>
</div>
We examine some of the key drivers of the oil price and on the whole we are relatively bullish as although we see some risk to demand growth forecasts in 2019, in the absence of a recession we think that supply has more room to surprise to the downside. Geopolitics and financial markets will play a huge role in prices. We think that US oil supply growth will be lower y/y in 2019, OPEC+ compliance with cuts will be high and maybe helped by unplanned disruptions and base production will decline more rapidly than forecast. Companies will accelerate the sanctioning of new projects in 2019 and also will increase exploration spending, despite a number of years of poor success rates - overall the trend should be positive for the offshore oil service companies. We expect strong LNG supply growth in 2019 to hit spot pricing but still expect a large number of projects to be sanctioned helping the LNG engineering and construction companies. It will be a very interesting year for the refining industry as new regulations limiting shipping sulphur emissions should lead to a spike in diesel and to some extent gasoline margins towards the end of the year, helping complex refiners. Major oil companies will continue to embrace renewables as investors continue to push for companies to plan for the energy transition.
The main stocks that we come out positive on are <a href="https://www.smartkarma.com/entities/12835" target="_blank" data-smartkarma-citation="entities:12835:1">Hess Corp (HES US)</a>, <a href="https://www.smartkarma.com/entities/12530" target="_blank" data-smartkarma-citation="entities:12530:1">Valero Energy (VLO US)</a>, <a href="https://www.smartkarma.com/entities/27505" target="_blank" data-smartkarma-citation="entities:27505:1">TechnipFMC PLC (FTI FP)</a>, <a href="https://www.smartkarma.com/entities/5780" target="_blank" data-smartkarma-citation="entities:5780:1">Kosmos Energy (KOS US)</a>, <a href="https://www.smartkarma.com/entities/9675" target="_blank" data-smartkarma-citation="entities:9675:1">Transocean Ltd (RIG US)</a>, <a href="https://www.smartkarma.com/entities/4324" target="_blank" data-smartkarma-citation="entities:4324:1">Golar Lng Ltd (GLNG US)</a> and <a href="https://www.smartkarma.com/entities/21364" target="_blank" data-smartkarma-citation="entities:21364:1">Galp Energia Sgps Sa (GALP PL)</a>.
We are more negative on <a href="https://www.smartkarma.com/entities/24253" target="_blank" data-smartkarma-citation="entities:24253:1">Cenovus Energy Inc (CVE CN)</a> , <a href="https://www.smartkarma.com/entities/22108" target="_blank" data-smartkarma-citation="entities:22108:1">Royal Dutch Shell (RDSA LN)</a> , <a href="https://www.smartkarma.com/entities/16683" target="_blank" data-smartkarma-citation="entities:16683:1">Cheniere Energy (LNG US)</a>; <a href="https://www.smartkarma.com/entities/11153" target="_blank" data-smartkarma-citation="entities:11153:1">Eog Resources (EOG US)</a> and <a href="https://www.smartkarma.com/entities/27640" target="_blank" data-smartkarma-citation="entities:27640:1">Ecopetrol SA (ECOPETL CB)</a> .


We run through our views on the main themes that will impact the oil and gas market in 2019 and the stocks to play these through. We outline the 10 key themes including oil demand, US oil supply growth, OPEC+ policy, base production decline rates, exploration potential and the outlook for new project final investment decisions. We also look at the refining market, LNG supply and demand, the M&amp;A prospects and the impact of the energy transition. We outline 12 stocks (7 bullish and 5 bearish calls) that we think you can play the themes through.

We examine some of the key drivers of the oil price and on the whole we are relatively bullish as although we see some risk to demand growth forecasts in 2019, in the absence of a recession we think that supply has more room to surprise to the downside. Geopolitics and financial markets will play a huge role in prices. We think that US oil supply growth will be lower y/y in 2019, OPEC+ compliance with cuts will be high and maybe helped by unplanned disruptions and base production will decline more rapidly than forecast. Companies will accelerate the sanctioning of new projects in 2019 and also will increase exploration spending, despite a number of years of poor success rates - overall the trend should be positive for the offshore oil service companies. We expect strong LNG supply growth in 2019 to hit spot pricing but still expect a large number of projects to be sanctioned helping the LNG engineering and construction companies. It will be a very interesting year for the refining industry as new regulations limiting shipping sulphur emissions should lead to a spike in diesel and to some extent gasoline margins towards the end of the year, helping complex refiners. Major oil companies will continue to embrace renewables as investors continue to push for companies to plan for the energy transition.
The main stocks that we come out positive on are Hess Corp (HES US), Valero Energy (VLO US), TechnipFMC PLC (FTI FP), Kosmos Energy (KOS US), Transocean Ltd (RIG US), Golar Lng Ltd (GLNG US) and Galp Energia Sgps Sa (GALP PL).
We are more negative on Cenovus Energy Inc (CVE CN) , Royal Dutch Shell (RDSA LN) , Cheniere Energy (LNG US); Eog Resources (EOG US) and Ecopetrol SA (ECOPETL CB) . 

2019 Energy Market Themes & Stocks with Exposure: Focus on Oil, Refining, LNG, M&A & Renewables

Japan/Asia Long-Short, LightStream Research

Mio Kato

Japan/Asia Long-Short

Long-Short Analysis on Japan, Asia and the World

LightStream Research

LightStream conducts quantitatively rigorous and data-driven analysis with a focus on Japan and Asia.

We consistently cover the Tech, Consumer and Industrial sectors, and provide ECM and Events coverage more broadly.

We supplement traditional qualitative insights from company relationships with a robust quantitative foundation that examines as much historical data as is available.
We further refine the accuracy of our insights and calls through the use of alternative data to flesh out current trends, and through a valuation framework that emphasises non-superficial peer group selection and a proper attempt to understand the metrics and changes that have driven security valuations in the past.

After <a href="https://www.smartkarma.com/entities/17524" target="_blank" data-smartkarma-citation="entities:17524:1">Mcdermott Intl (MDR US)</a> announced further write-downs related to the Cameron and Freeport LNG projects at its 3Q earnings, <a href="https://www.smartkarma.com/entities/6232" target="_blank" data-smartkarma-citation="entities:6232:1">Chiyoda Corp (6366 JP)</a>'s stock price entered free fall as the company came out with a ¥98bn downward revision, announcing losses that would severely weaken its balance sheet. The majority of this was driven by a ¥85bn write-down for Cameron but adjustments were also made to their Freeport and Tangguh projects.The expected ¥105bn net loss will be the worst in the company's history and the cumulative losses over the last three years (¥125.0bn) would now exceed the overall loss accumulated in the three years between 1997-1999 (¥116.7bn) when the company flirted with bankruptcy and became a sub ¥100 stock. Chiyoda now forms a triumvirate with <a href="https://www.smartkarma.com/entities/637" target="_blank" data-smartkarma-citation="entities:637:1">Toshiba Corp (6502 JP)</a>/Westinghouse and Mcdermott as companies announcing huge write-downs with the common thread being CB&amp;I. Toshiba's net losses before minority interests were ¥1,160bn while Mcdermott has avoided losses but been forced to write-down a total of $909m (¥103bn) since its acquisition of CB&amp;I.We examine the history of CB&amp;I and try to shed some light on the issues facing EPC companies in the US, potential root causes of these write-downs and an evaluation of Chiyoda's risk management below.

After Mcdermott Intl (MDR US) announced further write-downs related to the Cameron and Freeport LNG projects at its 3Q earnings, Chiyoda Corp (6366 JP)'s stock price entered free fall as the company came out with a ¥98bn downward revision, announcing losses that would severely weaken its balance sheet. The majority of this was driven by a ¥85bn write-down for Cameron but adjustments were also made to their Freeport and Tangguh projects.The expected ¥105bn net loss will be the worst in the company's history and the cumulative losses over the last three years (¥125.0bn) would now exceed the overall loss accumulated in the three years between 1997-1999 (¥116.7bn) when the company flirted with bankruptcy and became a sub ¥100 stock. Chiyoda now forms a triumvirate with Toshiba Corp (6502 JP)/Westinghouse and Mcdermott as companies announcing huge write-downs with the common thread being CB&amp;I. Toshiba's net losses before minority interests were ¥1,160bn while Mcdermott has avoided losses but been forced to write-down a total of $909m (¥103bn) since its acquisition of CB&amp;I.We examine the history of CB&amp;I and try to shed some light on the issues facing EPC companies in the US, potential root causes of these write-downs and an evaluation of Chiyoda's risk management below.

Chiyoda: Assessing Risk Management Amidst the Trail of Write-Downs in CB&I's Wake

Japan

CHIYODA CORPORATION constructs, inspects, and maintains industrial plants around the world.  Those plants include oil refinery, petrochemical, food, and pharmaceutical plants.  The Company also provides comprehensive engineering services for such as energy saving, factory automation (FA), and environmental preservation for water treatment and soil purification.

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Chiyoda Corp (6366 JP)

A Huge Wave of New LNG Projects Coming in the Next 18 Months: Positive for The E&C Companies

Our analysis shows that there are an unbelievable 25+ LNG developers that have stated (within the last year) they will take a final investment...

Anish Kapadia

Oil Majors Results: The Main Take-Aways. We Are Positive on Hess, Valero and Chevron

A number of the largest oil companies in the U.S. and Europe reported results last week including Exxon Mobil (XOM US) , Chevron Corp (CVX US) and...

Anish Kapadia

Japan: Consistency Scores - Steady Eddies V. Rollercoaster Rides

CONSISTENCY PAYS - In troubled markets, investors often seek out companies with greater earnings stability and a history of consistent stock...

Campbell Gunn

2019 Energy Market Themes & Stocks with Exposure: Focus on Oil, Refining, LNG, M&A & Renewables

We run through our views on the main themes that will impact the oil and gas market in 2019 and the stocks to play these through. We outline the...

Anish Kapadia

Chiyoda: Assessing Risk Management Amidst the Trail of Write-Downs in CB&I's Wake

After Mcdermott Intl (MDR US) announced further write-downs related to the Cameron and Freeport LNG projects at its 3Q earnings, Chiyoda Corp (6366...

Mio Kato

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