Highlights

• Recovery of oil price. Oil price rise from below US$45/bbl to above US$60/bbl due to OPEC production cut plan started end-2016. The plan caused reduction of oil inventories, with the difference to the five- year average reduced by around 183mb since the beginning of 2017 to stand at 154mb in September.

• Extension of production cut. Due to the success of production cut, OPEC and non-OPEC producers led by Russia, agreed to extend oil output cuts until end-2018 subject to review mid-June. Additionally, Libya and Nigeria have agreed to cap the combined output of both countries at 2017 levels (c.2.8m bbl/day).

• Raised oil price target to US$55-65/bbl. We raised our oil price target for 2018 to US$55-65/bbl as we opined rising geopolitical tensions may cause sudden supply shortages which could disrupt current balanced market.

• Petronas activity outlook. One of the few bright spot in the latest Petronas activity outlook report is Maintenance, Construction & Modification (MCM) activities which is expected to remain stable over the next few years due to increasing number of projects and ageing facilities. This is positive for major MCM players like Dayang, Petra Energy and Sapura Energy.

• LNG and petroleum tanker market remain subdued in the near term. LNG charter rates are still at low since 2011 and we do not foresee the rates to improve significantly due to significant supply overhang. Charter rates for petroleum tanker remain depressed but we opined the worst is over due to slower fleet growth and increasing oil demand going forward.

Risks

• Further slump in oil prices.

• Significant supply overhang in jack up rig market

Rating

NEUTRAL ( ↔ )

• While O&G companies’ earnings under coverage are believed to have bottomed in 2017, earnings recovery overall in 2018 is still not sufficient to justify a rerating on the sector as a whole. We elect to wait clearer signs of recovery to warrant a more drastic upgrade in sector.

Top Picks

• For exposure, our preferred pick is Dayang ( BUY ; TP: RM1.01 ).

Source: Hong Leong Investment Bank Research - 12 Jan 2018