Energy & Materials Sector

In this briefing:

1. Weekly Oil Views: Oil Weighs Mixed Economic Sentiment, with Wary Eye on Venezuela
2. Korea M&A Spotlight: Saudi Aramco Plans to Buy Up To 19.9% Stake in Hyundai Oilbank
3. Hyundai Heavy Holdco Trade: Long Holdco / Short HHI (30%) & SKI (70%) On Aramco Deal
4. New J. Hutton Exploration Report (Week Ending 18/1/19)
5. Weekly Oil Views: US, China Shore up Oil Market Sentiment

1. Weekly Oil Views: Oil Weighs Mixed Economic Sentiment, with Wary Eye on Venezuela

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.

2. Korea M&A Spotlight: Saudi Aramco Plans to Buy Up To 19.9% Stake in Hyundai Oilbank

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. 

3. Hyundai Heavy Holdco Trade: Long Holdco / Short HHI (30%) & SKI (70%) On Aramco Deal

• 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.

4. New J. Hutton Exploration Report (Week Ending 18/1/19)

• Launching weekly exploration report
• Initial coverage of 318 companies
• Eventual ASX, TSX & AIM coverage
• Scientific approach to determine prospectivity
• Selective judgement on announcement materiality
• Preference for gold
• Targeting company maker projects
• Best exploration tenements, Magnesium, graphite, metallurgical coal
• Paladin Energy (PDN AU), Admiralty Resources Nl (ADY AU) , Jameson Resources (JAL AU), Golden Rim Resources (GMR AU), Orion Gold Nl (ORN AU) , Talga Resources (TLG AU), Barra Resources (BAR AU), King River Resources (KRR AU), Korab Resources (KOR AU), Lefroy Exploration Ltd (LEX AU)

5. Weekly Oil Views: US, China Shore up Oil Market Sentiment

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.

In this briefing:

1. New J. Hutton Exploration Report (Week Ending 18/1/19)
2. Weekly Oil Views: US, China Shore up Oil Market Sentiment
3. Weekly Oil Views: Crude Back in a Bull Market but Cheer Momentum Wanes

1. New J. Hutton Exploration Report (Week Ending 18/1/19)

• Launching weekly exploration report
• Initial coverage of 318 companies
• Eventual ASX, TSX & AIM coverage
• Scientific approach to determine prospectivity
• Selective judgement on announcement materiality
• Preference for gold
• Targeting company maker projects
• Best exploration tenements, Magnesium, graphite, metallurgical coal
• Paladin Energy (PDN AU), Admiralty Resources Nl (ADY AU) , Jameson Resources (JAL AU), Golden Rim Resources (GMR AU), Orion Gold Nl (ORN AU) , Talga Resources (TLG AU), Barra Resources (BAR AU), King River Resources (KRR AU), Korab Resources (KOR AU), Lefroy Exploration Ltd (LEX AU)

2. Weekly Oil Views: US, China Shore up Oil Market Sentiment

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.

3. Weekly Oil Views: Crude Back in a Bull Market but Cheer Momentum Wanes

A nine-day winning streak until Thursday, January 10, had put Brent and WTI back in the bull market (gains of >20% from their 52-week lows). It was capped by a highly volatile trading day and a lower close of the benchmark crude futures on Friday, pointing to a return of uncertainty and indecisiveness in the market.

US-China trade talks over January 7-8, which were extended to January 9, set last week off to a flying start. There were no deals for sure, but the two sides appeared to have narrowed their differences. That was enough to send the stock markets climbing, with crude prices in tow.

Follow-up negotiations at a higher level are expected in the US later this month, though no dates have been announced yet. For now, it seems the financial markets, probably in gloom fatigue and perhaps oversold, needed any excuse to recover and a baby step towards the resolution of the US-China trade dispute was as good as any.

Of course, one can’t ignore the US Fed’s dovish turn, which also provided a major boost to sentiment. US Federal Reserve Chairman Jerome Powell said on Thursday that the central bank would be “patient” over future rate hikes. It was music to investors’ ears.

OPEC heavyweight Saudi Arabia repeated its promise to slash exports, with the energy minister providing specific figures for the benefit of the media and the market, and fundamentals had done their bit to help crude’s rally.

However, macroeconomic data and business outlook from companies across the world continues to be weak and disappointing. And crude remains firmly in the grip of the economic sentiment, maintaining a very strong correlation with the equity markets since last October.

In this briefing:

1. Weekly Oil Views: Crude Back in a Bull Market but Cheer Momentum Wanes
2. DNO/Faroe – And That’s A Wrap
3. Bank Mandiri (BMRI IJ) – Shape Shifting and Millenial Mortgages – On the Ground in J-Town
4. Weekly Oil Views: Crude Remains at the Mercy of Fickle Financial Markets

1. Weekly Oil Views: Crude Back in a Bull Market but Cheer Momentum Wanes

A nine-day winning streak until Thursday, January 10, had put Brent and WTI back in the bull market (gains of >20% from their 52-week lows). It was capped by a highly volatile trading day and a lower close of the benchmark crude futures on Friday, pointing to a return of uncertainty and indecisiveness in the market.

US-China trade talks over January 7-8, which were extended to January 9, set last week off to a flying start. There were no deals for sure, but the two sides appeared to have narrowed their differences. That was enough to send the stock markets climbing, with crude prices in tow.

Follow-up negotiations at a higher level are expected in the US later this month, though no dates have been announced yet. For now, it seems the financial markets, probably in gloom fatigue and perhaps oversold, needed any excuse to recover and a baby step towards the resolution of the US-China trade dispute was as good as any.

Of course, one can’t ignore the US Fed’s dovish turn, which also provided a major boost to sentiment. US Federal Reserve Chairman Jerome Powell said on Thursday that the central bank would be “patient” over future rate hikes. It was music to investors’ ears.

OPEC heavyweight Saudi Arabia repeated its promise to slash exports, with the energy minister providing specific figures for the benefit of the media and the market, and fundamentals had done their bit to help crude’s rally.

However, macroeconomic data and business outlook from companies across the world continues to be weak and disappointing. And crude remains firmly in the grip of the economic sentiment, maintaining a very strong correlation with the equity markets since last October.

2. DNO/Faroe – And That’s A Wrap

In my insight (DNO Closes In On Faroe) last week, I concluded a slight kiss to DNO ASA (DNO NO)‘s Offer for Faroe Petroleum (FPM LN), would get it over the line and this is exactly what transpired.

On January 8th, DNO referenced a statement made the previous day by the Norwegian Petroleum Directorate of a 30% reserves downgrade at Faroe’s Oda field from 47.2mn MMboe to 32.7 MMboe.

Shortly after that statement, on the same day, DNO capitalised on this negative newsflow and announced it had increased its (final) cash Offer to GBP 1.60/share, 5.3% above the initial Offer of GBP 1.52/share. DNO subsequently reported on January 9th that it had gained additional acceptances from shareholders representing ~8.65% of shares out, taking total acceptances to 52.44%. The offer will now become unconditional on January 11th (tomorrow) upon the settlement of these additional acceptances.  

Despite open hostilities to the initial offer, Faroe’s board has now accepted the increased Offer and recommends shareholders tender. 

Shares last closed at a price of GBP 1.61 and the final closing date is 1.00 p.m. (London time) on 23 January 2019.

3. Bank Mandiri (BMRI IJ) – Shape Shifting and Millenial Mortgages – On the Ground in J-Town

A recent meeting with Bank Mandiri Persero (BMRI IJ) in Jakarta confirmed a positive outlook for loan growth and net interest margins for 2019, with continuing incremental improvements to credit quality, especially in the MidCap and SME space.

The bank is optimistic about loan growth in 2019 but with a shift in the shape of growth, with Midcap and SME loans moving into positive territory, a slight tempering of growth from large corporates. 

Microlending continues to be a significant growth driver, especially salary-based loans, which have huge potential and are relatively low risk.   

Mandiri is switching its focus on smaller sized mortgages and is even offering products specifically targeting millennials. It is also training staff in its branches to promote both mortgages and auto loans, which should help to boost growth in consumer loans.

The bank is investing heavily in growing both Mandiri Online mobile banking, as well as working closely with the major e-commerce players in Indonesia. 

Management is optimistic about the outlook for net interest margins and comfortable with its funding requirements, with good visibility on credit quality. 

Bank Mandiri Persero (BMRI IJ) remains a key proxy for the Indonesian banking sector, with an increasingly well-diversified portfolio and growing exposure to the potentially higher growth areas of microlending and consumer loans. The bank has fully embraced modern day banking with strong growth in Mandiri Online, which should help the bank grow its transactional business and its current and savings accounts (CASA). Its push to grow salary-based loans is another business with huge potential, given the low penetration of its corporate pay-roll accounts. According to Cap IQ consensus estimates, the bank trades on 12.5x FY19E PER and 11.0x FY20E PER, with forecast EPS growth of +16.5% and +11.8% for FY19E and FY20E.  The bank trades on 1.9x FY18E PBV with an FY18E ROE of 13.9%, which is forecast to rise to 15.5% by FY20E. Given its higher growth profile and rising ROE, the bank looks relatively attractive compared to peers. 

4. Weekly Oil Views: Crude Remains at the Mercy of Fickle Financial Markets

It has been anything but a happy start to 2019 for the stock markets, which remained under pressure as trading resumed in the new year. A clutch of weak manufacturing data for December – from China to the eurozone and the US – soured the mood for investors through last week. 

That was followed by a rare revenue warning from Apple Inc (AAPL US) , citing slowing sales in China, which drew fresh attention to the vulnerability of American companies from the bitter trade war between the world’s two largest economies. The only assets that seemed to be in favour were the safe havens such as Gold (GOLD COMDTY) and the Japanese yen. 

Beijing provided the first major lift to market sentiment on Friday, by lowering the reserve requirement ratio for Chinese banks, in a bid to inject more cash into the system. US Fed Chairman Jerome Powell signalling a “patient” approach to monetary policy in a panel discussion in Atlanta later in the day and a strong US jobs report for December completed the trinity of factors that closed the week with a rally in stock markets as well as crude. 

Brent and WTI closed nearly 2% higher on the day, just above $57 and just under $48 respectively. Sentiment in the oil market was boosted by initial surveys showing a surprisingly large drop in OPEC production in December.

OPEC/non-OPEC cuts of 1.2 million b/d took effect on January 1 and should yield results in the coming weeks, but we expect crude to remain largely beholden to the twists and turns in the global economy. Just as in the broader financial markets, so in the oil markets, all eyes will now turn to the high-level trade negotiations between the US and China, due to be held in Beijing over January 7-8.  

In this briefing:

1. DNO/Faroe – And That’s A Wrap
2. Bank Mandiri (BMRI IJ) – Shape Shifting and Millenial Mortgages – On the Ground in J-Town
3. Weekly Oil Views: Crude Remains at the Mercy of Fickle Financial Markets
4. DNO Closes In On Faroe

1. DNO/Faroe – And That’s A Wrap

In my insight (DNO Closes In On Faroe) last week, I concluded a slight kiss to DNO ASA (DNO NO)‘s Offer for Faroe Petroleum (FPM LN), would get it over the line and this is exactly what transpired.

On January 8th, DNO referenced a statement made the previous day by the Norwegian Petroleum Directorate of a 30% reserves downgrade at Faroe’s Oda field from 47.2mn MMboe to 32.7 MMboe.

Shortly after that statement, on the same day, DNO capitalised on this negative newsflow and announced it had increased its (final) cash Offer to GBP 1.60/share, 5.3% above the initial Offer of GBP 1.52/share. DNO subsequently reported on January 9th that it had gained additional acceptances from shareholders representing ~8.65% of shares out, taking total acceptances to 52.44%. The offer will now become unconditional on January 11th (tomorrow) upon the settlement of these additional acceptances.  

Despite open hostilities to the initial offer, Faroe’s board has now accepted the increased Offer and recommends shareholders tender. 

Shares last closed at a price of GBP 1.61 and the final closing date is 1.00 p.m. (London time) on 23 January 2019.

2. Bank Mandiri (BMRI IJ) – Shape Shifting and Millenial Mortgages – On the Ground in J-Town

A recent meeting with Bank Mandiri Persero (BMRI IJ) in Jakarta confirmed a positive outlook for loan growth and net interest margins for 2019, with continuing incremental improvements to credit quality, especially in the MidCap and SME space.

The bank is optimistic about loan growth in 2019 but with a shift in the shape of growth, with Midcap and SME loans moving into positive territory, a slight tempering of growth from large corporates. 

Microlending continues to be a significant growth driver, especially salary-based loans, which have huge potential and are relatively low risk.   

Mandiri is switching its focus on smaller sized mortgages and is even offering products specifically targeting millennials. It is also training staff in its branches to promote both mortgages and auto loans, which should help to boost growth in consumer loans.

The bank is investing heavily in growing both Mandiri Online mobile banking, as well as working closely with the major e-commerce players in Indonesia. 

Management is optimistic about the outlook for net interest margins and comfortable with its funding requirements, with good visibility on credit quality. 

Bank Mandiri Persero (BMRI IJ) remains a key proxy for the Indonesian banking sector, with an increasingly well-diversified portfolio and growing exposure to the potentially higher growth areas of microlending and consumer loans. The bank has fully embraced modern day banking with strong growth in Mandiri Online, which should help the bank grow its transactional business and its current and savings accounts (CASA). Its push to grow salary-based loans is another business with huge potential, given the low penetration of its corporate pay-roll accounts. According to Cap IQ consensus estimates, the bank trades on 12.5x FY19E PER and 11.0x FY20E PER, with forecast EPS growth of +16.5% and +11.8% for FY19E and FY20E.  The bank trades on 1.9x FY18E PBV with an FY18E ROE of 13.9%, which is forecast to rise to 15.5% by FY20E. Given its higher growth profile and rising ROE, the bank looks relatively attractive compared to peers. 

3. Weekly Oil Views: Crude Remains at the Mercy of Fickle Financial Markets

It has been anything but a happy start to 2019 for the stock markets, which remained under pressure as trading resumed in the new year. A clutch of weak manufacturing data for December – from China to the eurozone and the US – soured the mood for investors through last week. 

That was followed by a rare revenue warning from Apple Inc (AAPL US) , citing slowing sales in China, which drew fresh attention to the vulnerability of American companies from the bitter trade war between the world’s two largest economies. The only assets that seemed to be in favour were the safe havens such as Gold (GOLD COMDTY) and the Japanese yen. 

Beijing provided the first major lift to market sentiment on Friday, by lowering the reserve requirement ratio for Chinese banks, in a bid to inject more cash into the system. US Fed Chairman Jerome Powell signalling a “patient” approach to monetary policy in a panel discussion in Atlanta later in the day and a strong US jobs report for December completed the trinity of factors that closed the week with a rally in stock markets as well as crude. 

Brent and WTI closed nearly 2% higher on the day, just above $57 and just under $48 respectively. Sentiment in the oil market was boosted by initial surveys showing a surprisingly large drop in OPEC production in December.

OPEC/non-OPEC cuts of 1.2 million b/d took effect on January 1 and should yield results in the coming weeks, but we expect crude to remain largely beholden to the twists and turns in the global economy. Just as in the broader financial markets, so in the oil markets, all eyes will now turn to the high-level trade negotiations between the US and China, due to be held in Beijing over January 7-8.  

4. DNO Closes In On Faroe

On 26 November 2018, 28.22%-shareholder DNO ASA (DNO NO) announced a cash offer for Faroe Petroleum (FPM LN) of GBP 1.52/share,  a 21% premium to the pre-announcement price on November 23rd, but a 44.8% premium to Faroe’s share price of GBP 1.05 as at 3 April 2018, the last business day before DNO announced its first acquisition of shares in Faroe. 

This is a hostile offer with DNO openly criticising the management’s corporate-governance culture, share performance, operational abilities, and deal-making. An indication of the level of this hostility can be found in the circular to shareholders (page 9):  “Since listing, no dividends have been paid and no capital otherwise returned to shareholders. Meanwhile, back at the ranch, the Faroe directors have been awarded a high number of share options at nil cost.” In response, Faroe’s board describes the deal as “opportunistic, unsolicited, and inadequate”, and has advised the shareholders to reject the offer. 

The deal was initially conditional on receiving a minimum acceptance of 57.5% of Faroe’s total issued share capital; however after acquiring shares in the market, DNO announced yesterday it held 30% of issued shares in Faroe, triggering a mandatory offer, and Faroe is now therefore subject to takeover regulation, and the deal requires a lower acceptance threshold of 50%.

Currently trading slightly through terms. Together with shares accepting its offer, DNO currently has 43.1%. 

The offer has now automatically been extended until the 18 January and DNO has until the 27 January to improve or revise the Offer. This may need a slight kiss to push it over the line. 

In this briefing:

1. Bank Mandiri (BMRI IJ) – Shape Shifting and Millenial Mortgages – On the Ground in J-Town
2. Weekly Oil Views: Crude Remains at the Mercy of Fickle Financial Markets
3. DNO Closes In On Faroe
4. 2019: Five Key Elements to Watch for in the Oil Market

1. Bank Mandiri (BMRI IJ) – Shape Shifting and Millenial Mortgages – On the Ground in J-Town

A recent meeting with Bank Mandiri Persero (BMRI IJ) in Jakarta confirmed a positive outlook for loan growth and net interest margins for 2019, with continuing incremental improvements to credit quality, especially in the MidCap and SME space.

The bank is optimistic about loan growth in 2019 but with a shift in the shape of growth, with Midcap and SME loans moving into positive territory, a slight tempering of growth from large corporates. 

Microlending continues to be a significant growth driver, especially salary-based loans, which have huge potential and are relatively low risk.   

Mandiri is switching its focus on smaller sized mortgages and is even offering products specifically targeting millennials. It is also training staff in its branches to promote both mortgages and auto loans, which should help to boost growth in consumer loans.

The bank is investing heavily in growing both Mandiri Online mobile banking, as well as working closely with the major e-commerce players in Indonesia. 

Management is optimistic about the outlook for net interest margins and comfortable with its funding requirements, with good visibility on credit quality. 

Bank Mandiri Persero (BMRI IJ) remains a key proxy for the Indonesian banking sector, with an increasingly well-diversified portfolio and growing exposure to the potentially higher growth areas of microlending and consumer loans. The bank has fully embraced modern day banking with strong growth in Mandiri Online, which should help the bank grow its transactional business and its current and savings accounts (CASA). Its push to grow salary-based loans is another business with huge potential, given the low penetration of its corporate pay-roll accounts. According to Cap IQ consensus estimates, the bank trades on 12.5x FY19E PER and 11.0x FY20E PER, with forecast EPS growth of +16.5% and +11.8% for FY19E and FY20E.  The bank trades on 1.9x FY18E PBV with an FY18E ROE of 13.9%, which is forecast to rise to 15.5% by FY20E. Given its higher growth profile and rising ROE, the bank looks relatively attractive compared to peers. 

2. Weekly Oil Views: Crude Remains at the Mercy of Fickle Financial Markets

It has been anything but a happy start to 2019 for the stock markets, which remained under pressure as trading resumed in the new year. A clutch of weak manufacturing data for December – from China to the eurozone and the US – soured the mood for investors through last week. 

That was followed by a rare revenue warning from Apple Inc (AAPL US) , citing slowing sales in China, which drew fresh attention to the vulnerability of American companies from the bitter trade war between the world’s two largest economies. The only assets that seemed to be in favour were the safe havens such as Gold (GOLD COMDTY) and the Japanese yen. 

Beijing provided the first major lift to market sentiment on Friday, by lowering the reserve requirement ratio for Chinese banks, in a bid to inject more cash into the system. US Fed Chairman Jerome Powell signalling a “patient” approach to monetary policy in a panel discussion in Atlanta later in the day and a strong US jobs report for December completed the trinity of factors that closed the week with a rally in stock markets as well as crude. 

Brent and WTI closed nearly 2% higher on the day, just above $57 and just under $48 respectively. Sentiment in the oil market was boosted by initial surveys showing a surprisingly large drop in OPEC production in December.

OPEC/non-OPEC cuts of 1.2 million b/d took effect on January 1 and should yield results in the coming weeks, but we expect crude to remain largely beholden to the twists and turns in the global economy. Just as in the broader financial markets, so in the oil markets, all eyes will now turn to the high-level trade negotiations between the US and China, due to be held in Beijing over January 7-8.  

3. DNO Closes In On Faroe

On 26 November 2018, 28.22%-shareholder DNO ASA (DNO NO) announced a cash offer for Faroe Petroleum (FPM LN) of GBP 1.52/share,  a 21% premium to the pre-announcement price on November 23rd, but a 44.8% premium to Faroe’s share price of GBP 1.05 as at 3 April 2018, the last business day before DNO announced its first acquisition of shares in Faroe. 

This is a hostile offer with DNO openly criticising the management’s corporate-governance culture, share performance, operational abilities, and deal-making. An indication of the level of this hostility can be found in the circular to shareholders (page 9):  “Since listing, no dividends have been paid and no capital otherwise returned to shareholders. Meanwhile, back at the ranch, the Faroe directors have been awarded a high number of share options at nil cost.” In response, Faroe’s board describes the deal as “opportunistic, unsolicited, and inadequate”, and has advised the shareholders to reject the offer. 

The deal was initially conditional on receiving a minimum acceptance of 57.5% of Faroe’s total issued share capital; however after acquiring shares in the market, DNO announced yesterday it held 30% of issued shares in Faroe, triggering a mandatory offer, and Faroe is now therefore subject to takeover regulation, and the deal requires a lower acceptance threshold of 50%.

Currently trading slightly through terms. Together with shares accepting its offer, DNO currently has 43.1%. 

The offer has now automatically been extended until the 18 January and DNO has until the 27 January to improve or revise the Offer. This may need a slight kiss to push it over the line. 

4. 2019: Five Key Elements to Watch for in the Oil Market

As we turn the page into 2019, uncertainties over the world’s economic environment are stacked so high, that it would be presumptuous to try and read the fortunes of the oil market in great detail.

 We expect plenty of volatility and surprises in a very event- and sentiment-driven environment for the oil market next year.

In this year-ender, we cast our eye over the first half of 2019, which promises to be action-packed, with major deadlines and signposts that could set the tone for the rest of the year.

 We have identified the following five key elements that will shape the oil market:

• Economic sentiment to remain in the driver’s seat
• OPEC/non-OPEC compliance will be strong
• Demand growth rather than oversupply will be key
• Prices could rebound by end of Q1
• Wild cards: Iran sanctions, US recession 

In this briefing:

1. Weekly Oil Views: Crude Remains at the Mercy of Fickle Financial Markets
2. DNO Closes In On Faroe
3. 2019: Five Key Elements to Watch for in the Oil Market

1. Weekly Oil Views: Crude Remains at the Mercy of Fickle Financial Markets

It has been anything but a happy start to 2019 for the stock markets, which remained under pressure as trading resumed in the new year. A clutch of weak manufacturing data for December – from China to the eurozone and the US – soured the mood for investors through last week. 

That was followed by a rare revenue warning from Apple Inc (AAPL US) , citing slowing sales in China, which drew fresh attention to the vulnerability of American companies from the bitter trade war between the world’s two largest economies. The only assets that seemed to be in favour were the safe havens such as Gold (GOLD COMDTY) and the Japanese yen. 

Beijing provided the first major lift to market sentiment on Friday, by lowering the reserve requirement ratio for Chinese banks, in a bid to inject more cash into the system. US Fed Chairman Jerome Powell signalling a “patient” approach to monetary policy in a panel discussion in Atlanta later in the day and a strong US jobs report for December completed the trinity of factors that closed the week with a rally in stock markets as well as crude. 

Brent and WTI closed nearly 2% higher on the day, just above $57 and just under $48 respectively. Sentiment in the oil market was boosted by initial surveys showing a surprisingly large drop in OPEC production in December.

OPEC/non-OPEC cuts of 1.2 million b/d took effect on January 1 and should yield results in the coming weeks, but we expect crude to remain largely beholden to the twists and turns in the global economy. Just as in the broader financial markets, so in the oil markets, all eyes will now turn to the high-level trade negotiations between the US and China, due to be held in Beijing over January 7-8.  

2. DNO Closes In On Faroe

On 26 November 2018, 28.22%-shareholder DNO ASA (DNO NO) announced a cash offer for Faroe Petroleum (FPM LN) of GBP 1.52/share,  a 21% premium to the pre-announcement price on November 23rd, but a 44.8% premium to Faroe’s share price of GBP 1.05 as at 3 April 2018, the last business day before DNO announced its first acquisition of shares in Faroe. 

This is a hostile offer with DNO openly criticising the management’s corporate-governance culture, share performance, operational abilities, and deal-making. An indication of the level of this hostility can be found in the circular to shareholders (page 9):  “Since listing, no dividends have been paid and no capital otherwise returned to shareholders. Meanwhile, back at the ranch, the Faroe directors have been awarded a high number of share options at nil cost.” In response, Faroe’s board describes the deal as “opportunistic, unsolicited, and inadequate”, and has advised the shareholders to reject the offer. 

The deal was initially conditional on receiving a minimum acceptance of 57.5% of Faroe’s total issued share capital; however after acquiring shares in the market, DNO announced yesterday it held 30% of issued shares in Faroe, triggering a mandatory offer, and Faroe is now therefore subject to takeover regulation, and the deal requires a lower acceptance threshold of 50%.

Currently trading slightly through terms. Together with shares accepting its offer, DNO currently has 43.1%. 

The offer has now automatically been extended until the 18 January and DNO has until the 27 January to improve or revise the Offer. This may need a slight kiss to push it over the line. 

3. 2019: Five Key Elements to Watch for in the Oil Market

As we turn the page into 2019, uncertainties over the world’s economic environment are stacked so high, that it would be presumptuous to try and read the fortunes of the oil market in great detail.

 We expect plenty of volatility and surprises in a very event- and sentiment-driven environment for the oil market next year.

In this year-ender, we cast our eye over the first half of 2019, which promises to be action-packed, with major deadlines and signposts that could set the tone for the rest of the year.

 We have identified the following five key elements that will shape the oil market:

• Economic sentiment to remain in the driver’s seat
• OPEC/non-OPEC compliance will be strong
• Demand growth rather than oversupply will be key
• Prices could rebound by end of Q1
• Wild cards: Iran sanctions, US recession 

In this briefing:

1. DNO Closes In On Faroe
2. 2019: Five Key Elements to Watch for in the Oil Market

1. DNO Closes In On Faroe

On 26 November 2018, 28.22%-shareholder DNO ASA (DNO NO) announced a cash offer for Faroe Petroleum (FPM LN) of GBP 1.52/share,  a 21% premium to the pre-announcement price on November 23rd, but a 44.8% premium to Faroe’s share price of GBP 1.05 as at 3 April 2018, the last business day before DNO announced its first acquisition of shares in Faroe. 

This is a hostile offer with DNO openly criticising the management’s corporate-governance culture, share performance, operational abilities, and deal-making. An indication of the level of this hostility can be found in the circular to shareholders (page 9):  “Since listing, no dividends have been paid and no capital otherwise returned to shareholders. Meanwhile, back at the ranch, the Faroe directors have been awarded a high number of share options at nil cost.” In response, Faroe’s board describes the deal as “opportunistic, unsolicited, and inadequate”, and has advised the shareholders to reject the offer. 

The deal was initially conditional on receiving a minimum acceptance of 57.5% of Faroe’s total issued share capital; however after acquiring shares in the market, DNO announced yesterday it held 30% of issued shares in Faroe, triggering a mandatory offer, and Faroe is now therefore subject to takeover regulation, and the deal requires a lower acceptance threshold of 50%.

Currently trading slightly through terms. Together with shares accepting its offer, DNO currently has 43.1%. 

The offer has now automatically been extended until the 18 January and DNO has until the 27 January to improve or revise the Offer. This may need a slight kiss to push it over the line. 

2. 2019: Five Key Elements to Watch for in the Oil Market

As we turn the page into 2019, uncertainties over the world’s economic environment are stacked so high, that it would be presumptuous to try and read the fortunes of the oil market in great detail.

 We expect plenty of volatility and surprises in a very event- and sentiment-driven environment for the oil market next year.

In this year-ender, we cast our eye over the first half of 2019, which promises to be action-packed, with major deadlines and signposts that could set the tone for the rest of the year.

 We have identified the following five key elements that will shape the oil market:

• Economic sentiment to remain in the driver’s seat
• OPEC/non-OPEC compliance will be strong
• Demand growth rather than oversupply will be key
• Prices could rebound by end of Q1
• Wild cards: Iran sanctions, US recession