Carnarvon Petroleum (CVN AU) has announced a A$50mm equity raise to fund the appraisal of its key Dorado discovery this year and a further exploration well in the area. We discuss why we see Carnarvon’s assets as attractive.
A high-level US delegation will be in Beijing for trade talks in the week of February 11, but Donald Trump rattled the markets on February 7 by saying that he would not be meeting his Chinese counterpart Xi Jinping before the March 1 deadline for the two countries to forge a deal or possibly end up escalating their battle.
That forced the financial markets to recalibrate their optimism with regard to the two countries putting all their conflicts behind them soon. Oil swooned along with global equities.
Trump had tweeted at the end of January that a “final deal” would not be made until he and Xi met and thrashed out some of the “long-standing” and “more difficult” issues the US has with Chinese trade practices.
With a comprehensive US-China trade deal in the next few weeks ruled out, and a ratcheting up of US tariffs from March 2 equally inconceivable, we discuss the likely middle-ground scenarios and what they mean for crude price direction.
Overall, though, the oil market could remain in limbo for a while. There are a number of supply risks gathering on the horizon, but those will likely not move center-stage until the economic worries that have gripped investors since the fourth quarter of last year are laid to rest.
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A high-level US delegation will be in Beijing for trade talks in the week of February 11, but Donald Trump rattled the markets on February 7 by saying that he would not be meeting his Chinese counterpart Xi Jinping before the March 1 deadline for the two countries to forge a deal or possibly end up escalating their battle.
That forced the financial markets to recalibrate their optimism with regard to the two countries putting all their conflicts behind them soon. Oil swooned along with global equities.
Trump had tweeted at the end of January that a “final deal” would not be made until he and Xi met and thrashed out some of the “long-standing” and “more difficult” issues the US has with Chinese trade practices.
With a comprehensive US-China trade deal in the next few weeks ruled out, and a ratcheting up of US tariffs from March 2 equally inconceivable, we discuss the likely middle-ground scenarios and what they mean for crude price direction.
Overall, though, the oil market could remain in limbo for a while. There are a number of supply risks gathering on the horizon, but those will likely not move center-stage until the economic worries that have gripped investors since the fourth quarter of last year are laid to rest.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
Modec Inc (6269 JP) reported strong 2018 results as operations for the year went smoothly and gross margin recovered to double digits in the fourth quarter with the company also releasing its contingency reserves resulting in a large uptick in SPC related earnings below the operating line.
Results vs. Guidance
Results vs. Consensus
Results vs. Consensus High
Guidance vs. Consensus
OP
+24%
+16%
+14%
-42%
Current Profit
+31%
+24%
+20%
-30%
NP
+46%
+33%
+19%
-32%
Like last year however, guidance disappointed as the company released what we consider to be lowball estimates. Nevertheless, the stock reacted positively as the strong results offset some of the recent negativity from the large fall in crude prices. We examine the degree of conservatism we see in guidance below.
We initiate coverage of BCP with a BUY rating, based on a target price of Bt41, which is derived from a sum-of-the-parts (SOTP) methodology and imply to 10.2xPE’19E to bring it in line with the Thai energy sector.
The story:
Attractive dividend yield of 6-7% a year
Refining business set to recover in 2019
Hidden value from non-core business
Risks:
Raw material price fluctuation
Possibility of impairment losses from investment projects
Background: Established in 1940, Bangchak Corporation Public Company Limited and its subsidiaries ‘ operations include refinery, oil trading, petroleum product marketing and renewable energy businesses. With a capacity of 120,000 barrels per day, Bangchak produces and distributes its products through more than 1,000 service stations nationwide. It also plans to expand the scope of its business to cover food and convenience stores and novel product businesses and to seek investment opportunities in bio-based products and natural resource businesses.
Qatar Petroleum and Exxon Mobil (XOM US) have taken a positive final investment decision (FID) on the Golden Pass LNG export facility on the US Gulf Coast, one of 25 projects up for FID this year globally. Golden Pass awarded the engineering, procurement and construction (EPC) contracts for the project to a joint venture of Chiyoda Corp (6366 JP), Mcdermott Intl (MDR US) and Zachry Group, with the project expected to cost US$10bn and come on line in 2024. We discuss the company impacts, the project detail and market impacts
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We initiate coverage of BCP with a BUY rating, based on a target price of Bt41, which is derived from a sum-of-the-parts (SOTP) methodology and imply to 10.2xPE’19E to bring it in line with the Thai energy sector.
The story:
Attractive dividend yield of 6-7% a year
Refining business set to recover in 2019
Hidden value from non-core business
Risks:
Raw material price fluctuation
Possibility of impairment losses from investment projects
Background: Established in 1940, Bangchak Corporation Public Company Limited and its subsidiaries ‘ operations include refinery, oil trading, petroleum product marketing and renewable energy businesses. With a capacity of 120,000 barrels per day, Bangchak produces and distributes its products through more than 1,000 service stations nationwide. It also plans to expand the scope of its business to cover food and convenience stores and novel product businesses and to seek investment opportunities in bio-based products and natural resource businesses.
Qatar Petroleum and Exxon Mobil (XOM US) have taken a positive final investment decision (FID) on the Golden Pass LNG export facility on the US Gulf Coast, one of 25 projects up for FID this year globally. Golden Pass awarded the engineering, procurement and construction (EPC) contracts for the project to a joint venture of Chiyoda Corp (6366 JP), Mcdermott Intl (MDR US) and Zachry Group, with the project expected to cost US$10bn and come on line in 2024. We discuss the company impacts, the project detail and market impacts
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Medco initially made an unsolicited approach for Ophir at £0.58/share on 22nd October 2018, and indicated a “willingness to consider offering Ophir’s shareholders additional potential consideration via contingent value rights in relation to the Fortuna LNG asset in Equatorial Guinea (which at the time was awaiting an extension approval) subject to further analysis and due diligence“. Given uncertainty that persevered on Fortuna’s license extension, Medco revised its bid to £0.538/share on 20th December 2018.
On 7th January 2019, Ophir announced that it was recording a $300mn non-cash impairment following the denial of the license extension for the Fortuna project by the Equatorial Guinea Ministry of Mines and Hydrocarbons. Ophir had previously written down $310mn back in September. Subsequently, Medco revised its bid further down to £0.485 on 11th January 2019 but this offer was rejected by Ophir’s board.
Medco’s latest offer of £0.55/share is a 66% premium to the closing price of £0.33 on 28 December 2018. Ophir’s board has unanimously recommended the latest offer stating that the deal offered “upfront cash value” to its shareholders and that the offer price “reflects the future prospects of Ophir’s high-quality assets“.
The deal is conditional on receiving 75% shareholder approval, receiving of clearances from the relevant authorities in Tanzania and Ophir not losing all or substantially all of its Bualuang interests in Thailand. It is expected that the Scheme will become effective in the first half of2019.
Medco’s offer does provide long-suffering Ophir shareholders with an okay exit in a less-than-ideal situation. Ophir’s shares have been trading at or close to terms. Given Medco’s numerous proposals in short succession – four in three months – a bump cannot be dismissed. And the recent disclosure of a new shareholder may warrant such an outcome. But I’d be disinclined to chase through terms.
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 & Stocks with Exposure: Focus on Oil, Refining, LNG, M&A & Renewables.
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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 & Stocks with Exposure: Focus on Oil, Refining, LNG, M&A & Renewables.
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US sanctions against Venezuela’s central bank and PDVSA, announced on Monday (January 28), have sent refiners on the US Gulf Coast scrambling for replacement supplies of heavy crude. Though they do not cover the business of non-US entities with PDVSA, the move has put Venezuelan crude importers in China and India on notice.
For US refiners, the three main alternative suppliers of heavy, sour crude — Canada, Mexico and Saudi Arabia — are either constrained in their ability to step up supply or are deliberately reducing shipments.
Venezuela’s upstream oil sector has been limping for a long time now. But the sanctions against PDVSA may deal it a death blow. The crude market is keeping a wary eye on the situation but appears unwilling to price in the worst-case scenario for the time being, as it remains fixated on the global economic prospects and concerns over oil demand growth.
We look at the fallout of the latest move by Washington on the primary entities doing oil business with Venezuela: refiners in the US, China and India (the main markets for Venezuelan crude) and Russian giants Rosneft and Lukoil.
We also discuss the likelihood and impact of Venezuelan crude production grinding down from the current 1 million b/d to zero.
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Brent’s rise from 52 support has so far fallen in line with a corrective rise that is starting to run out of steam. In this webcast we outline key pivot levels to buy and where we see a rally exhausting ahead of a fresh re test on lower support levels.
Oil remains a good barometer of global growth, which is set to slow into the summer and more so in 2020. Oil will also respond to a improved sentiment on China/US trade. Venezuela’s supply concerns failed to induce any real reaction as major players appear to be building short positions into strength. Tactically, oil is reaching for a minor new high and the failure to rally on potential supply constraints does play into a pending cycle peak.
We run through our tactical sequence as well as our macro view into 2020 (more bearish).
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The price rally in crude stalled last week, amid mixed messages from Trump administration officials about the prospects of the US and China being able to end their trade war soon.
Investors swayed by the barrage of overly optimistic soundbites from Washington and Beijing since the January 7-9 mid-level negotiations got a reality check from analysts as well as officials pointing to the dispute over China’s intellectual property rights violations, which remains a major sticking point.
The International Monetary Fund cut its forecast for 2019 global economic growth to 3.5%, the second downward revision in three months.
OPEC member Venezuela descended into a major political crisis, with opposition leader Juan Guaido mounting a major challenge to President Nicolas Maduro’s administration, but an oil market still under a cloud of bearishness from weak global economic sentiment all but shrugged it off. The outcome of the standoff is highly unpredictable. For the oil market, a lot would depend on how smooth any handover of power is and how it affects the already plummeting Venezuelan crude production.
The fourth-quarter 2018 earnings of major oilfield service provider Halliburton Co (HAL US) and Schlumberger Ltd (SLB US) offer important clues to the health of the US shale industry, where activity took a hit amidst the downward spiral in oil prices in Q4.
The latest data on the positions of the various categories of traders in Brent futures shows that not only do speculative bulls remain on the sidelines, but the so-called non-commercial players actually raised their bearish bets on crude prices in the week to January 22.
It was announced today that Saudi Aramco plans to purchase up to 19.9% stake in Hyundai Oilbank for about 1.8 trillion won from Hyundai Heavy Industries Holdings (267250 KS) (HHIH), which would suggest nearly 9 trillion won in total value for Hyundai Oilbank. The following are the major highlights of the potential investment in Hyundai Oilbank by Saudi Aramco:
Higher dividends for both Hyundai Oilbank and Hyundai Heavy Industries Holdings – At end of 2018, HHIH converted nearly 2 trillion won of capital surplus into retained earnings, which should allow the company to pay out higher dividends. HHIH has already declared that its long term plans include maintaining a 5% dividend yield and more than 70% dividend payout.
Greater Investments in Robotics – HHIH is likely to use a big portion of the proceeds from the sale of its stake in Hyundai Oilbank to further invest in the robotics business.
Our sum-of-the-parts valuation of Hyundai Heavy Industries Holdings suggests a value of 487,000 won, which is 28% higher than current share price.
Korea’s local news outlet reported that Saudi Aramco agrees to buy a 15~20% stake in Hyundai Oilbank Co Ltd (1082Z KS) in a pre-IPO deal. Aramco has reported priced Oilbank at ₩10tril. Hyundai Heavy Industries Holdings (267250 KS) is currently at a 50% discount to NAV. Assuming no change in Oilbank’s ₩10tril value reaffirmed by Aramco, this is like a 6%p drop in two months.
At this much holdco discount, I’d go long HHIH on the Aramco deal. This will make enough cash injection to Holdco. Oilbank’s ₩10tril valuation stays intact despite the recent de-valuation of the local peers on falling oil prices.
Holdco is basically 70% Oilbank and 30% HHI. I’d first pick Hyundai Heavy Industries (009540 KS) for 30%. The HHIH/HHI duo is at 20D MA. But on 120D horizon, they are pretty closer to the lowest. For the other 70%, I’d short SK Innovation (096770 KS). SK Innovation has been less price corrected lately compared with S Oil. On a 20D MA, the HHIH/SK Innovation duo is close to -1σ.
Reports of overtures and concessions from both Washington and Beijing were coming thick and fast by the time last week came to a close, providing a big boost to stock markets across the globe as well as crude.
The US-China trade spat has hung like an ominous and growing cloud over the prospects of global economic growth in 2019, becoming one of the major reasons for increasing risk aversion among investors since last October. As stock markets plummeted amid a sustained and steep sell-off, oil was dragged along for the ride.
If the US and China manage a rapprochement in the coming days and weeks, investor sentiment will recover, stocks will rebound, and so will crude prices.
Benchmark Brent and WTI crude futures settled at two-month highs on January 18, having retraced 24% and 27% respectively from their 52-week lows hit on Christmas eve. However, they are still 27% and 30% below the four-year peak hit on October 3.
How much further does crude have to go? In the next few days and weeks, it could claw back some more of its Q4 losses, especially if the US and China take concrete steps to unwind their bruising trade war. Once this big pressure is removed (excepting any last-minute surprises that stall or worsen the tensions), leading to a rosier outlook for global oil demand growth, crude will reconnect with its fundamentals. That could put OPEC back in the driver’s seat, and see market sentiment recovering as the OPEC/non-OPEC cuts mop up surplus barrels. Our most bullish scenario for the first quarter sees Brent climbing from the low-$60s towards $70/barrel. We see WTI $8-10 below Brent.
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