In this briefing:
- Weekly Oil Views: Crude Back in a Bull Market but Cheer Momentum Wanes
- DNO/Faroe – And That’s A Wrap
- Bank Mandiri (BMRI IJ) – Shape Shifting and Millenial Mortgages – On the Ground in J-Town
- 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.
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