The oil market seems to be on a comeback, following news of renewed US sanctions on Iran. According to DBS, the rest of the OPEC may not have enough spare capacity to ramp up sufficiently to replace supplies from Iran. This will cause the supply side to remain fundamentally tight in the coming months and lead to higher oil prices in the rest of 2018 and 2019. For investors who are looking to capitalise on the impending rise in oil prices, there are four oil plays that you can look at.
Investors Takeaway: 4 Oil Plays As Iran Gets Sanctioned
As a pure offshore upstream play, CNOOC is the best proxy for investors to ride oil price. CNOOC has demonstrated its world-class execution and cost control capabilities with stronger than expected core profit and impressive cost reduction in 1H18. CNOOC has stayed ahead of its peers with world class cost control.
Together with its cost control measure, CNOOC’s renewed and sharpened focus on tapping lower-cost resources could reverse the 20-year secular downtrend on return on equity. A recovery in oil prices should drive up return on equity and re-rate its valuation multiples.
BUY, TP HK$16.50; Current share price HK$14.84
Even though PetroChina is an integrated oil company, its Exploration&Production (E&P) segment is a key to its share price re-rating. Historically, the E&P segment has accounted for the majority of its operating profits. Based on PetroChina’s current valuation, its E&P segment is being undervalued by the market. Despite operational improvements, PetroChina’s share price has not moved very much from 2015’s low. Meanwhile, its peers have mostly recovered 70 to 80 percent.
According to DBS, this could be due to market jitters over lagging earnings recovery and policy uncertainties especially on the gas and pipeline front. However, DBS thinks that the steep undervaluation should narrow with recent oil price upswing translating to better earnings, and more clarity on favourable policies.
Stronger-than-expected oil prices could spark upside to share price. Improvement in E&P, divestment of pipeline assets, and more favourable pricing/policy on its loss-making imported natural gas are also key catalysts for PetroChina’s share price.
BUY, TP HK$8.20; Current share price HK$6.19
- Medco Energi Internasional
Medco Energi Internasional (Medco) is among the beneficiaries of a positive oil price outlook. Medco’s earnings are expected to benefit from the higher oil price trend, thanks to its low-cost structure and room to boost output.
Besides its higher core earnings visibility, DBS believes that Medco remains underappreciated by the market. Its current valuation of is undemanding, given its profitable power business that generates EBITDA of US$100 million per annum. There are also further earnings upside from its mining division that has now entered phase seven development.
BUY, TP IDR1,530; Current share price IDR900
DBS has taken a liking for Sinopec thanks to its earnings resilience having a good mix of upstream and downstream assets. Sinopec also provides shareholders with a lucrative dividend yield of 8 to 9 percent, backed by its strong cash flow generation and solid balance sheet.
Sinopec has been a key beneficiary of stricter policies lately, which was aimed at tackling tax evasion in China. This should lower teapot refiners’ access to cheap feedstock and support refined fuel prices. Right now, the company is working on addressing the high E&P breakeven and low reserves, which DBS thinks could be a catalyst in rejuvenating interest in Sinopec’s shares. The IPO of its marketing arm is also in the making, which DBS thinks will unlock value in the share price of Sinopec, potentially giving investors a 10 percent upside.
BUY, TP HK$9.30; Current share price HK$7.75
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