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Regional Oil & Gas Summary - 25 June 2014

Core Content Overview

This document provides an analysis of the oil and gas market in various regions, including updates on fuel prices, LNG demand, company performance, and investment ratings. It also includes a detailed valuation comparison of major oil and gas companies across Asia, with a focus on both energy producers and oil service providers.

Main Market Updates

• Fuel Prices:

  • Shandong independent refiners have maintained stable fuel prices ahead of a potential gasoline and diesel price hike.
  • China's oil product stock decreased by 5.48% MoM in May.

• LNG Market:

  • Singapore-based KS Drilling sold an offshore rig for USD85m to ICBC, which will lease it to COSL.
  • Japan's demand for Australian LNG is expected to decline due to its energy strategies, including nuclear power plant restarts.
  • Osaka Gas anticipates increased LNG imports in the future to reduce fuel costs as Japan liberalizes its power market.

• Shipping Industry:

  • Sumitomo Heavy Industries delivered an oil tanker for Pertamina, which will be reflagged to Indonesia.

Investment Reports

SapuraKencana Petroleum

• Rating: BUY
• Target Price: MYR5.30
• Key Points:
  • 1QFY1/15 core net profit in line with expectations.
  • Secured two EPCIC contracts worth MYR1.3b, increasing backlog to MYR30b.
  • Positive outlook on future performance.

Offshore & Marine

• Rating: NEUTRAL
• Key Points:
  • OSV operators remain optimistic about long-term demand but cautious about short-term challenges.
  • Replacement demand for OSVs is expected to be driven by the need for newer vessels.
  • Recommended companies: Ezion, Mermaid Maritime, Nam Cheong, and Vard.

PetroChina

• Rating: BUY
• Target Price: HKD11.50
• Key Points:
  • The true value of its assets is not yet fully reflected.
  • PetroChina is a key beneficiary of the W2E pipeline sell-off.
  • Access to transmission pipelines could allow private capital into natural gas production and lead to price liberalization.

Sinopec

• Rating: HOLD
• Target Price: HKD6.85
• Key Points:
  • Lacks catalysts for further re-rating.
  • Plans to use private capital are optimistic, but investment in shale gas and natural gas distribution will take time.
  • Despite outperforming the MSCI China index by 22%, consensus earnings are still weak.

CNOOC

• Rating: HOLD
• Target Price: HKD14.34
• Key Points:
  • Uninspiring earnings outlook unless oil prices rise.
  • Projected volume growth and oil prices result in a low CAGR due to cost inflation.
  • FCF return on new barrels is challenging, similar to other major producers.

NewOcean Energy

• Rating: BUY
• Target Price: HKD8.88
• Key Points:
  • Positioned to benefit from the auto LNG market, which is growing rapidly in China.
  • Expanding auto LNG alliance in Guangdong.
  • Expected to be the largest auto natural gas distributor in China by 2017.

Valuation Comparison

Asia Oil & Gas

Asia Oil Service

Key Insights

• Market Trends:

  • The energy reform in China is progressing, leading to structural changes in the industry.
  • The auto LNG segment is expected to grow significantly in China, offering opportunities for companies like NewOcean Energy.
  • Japan's LNG import volume is expected to change due to utility reform and shifting energy strategies.

• Valuation Metrics:

  • Valuation multiples are weighted by market capitalization.
  • Companies such as PetroChina, NewOcean Energy, and Cairn India are rated positively.
  • CNOOC and Sinopec are held due to limited upside and unattractive fundamentals.

• Investment Outlook:

  • BUY ratings are given to companies with strong growth potential and favorable market positioning.
  • HOLD ratings are assigned to companies with limited catalysts or weak earnings outlooks.
  • NEUTRAL ratings are given to sectors with mixed outlooks and long-term fundamentals.

This summary highlights key market movements, company-specific updates, and investment ratings across the oil and gas sector in Asia and other regions.