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