Investment Thesis
The possible plan to cut total OPEC output to between 32.5mb/d to 33mb/d will be decided at the OPEC meeting by end of November 2016. If the supply cut does not fall below 32.69mb/d, the glut of oil will continue, based on estimated world oil demand for 2017.
Capital expenditure (CAPEX) cut on exploration and production has led to operating expenditure (OPEX) reduction among the industry.
The upswing in offshore wind infrastructure development will pull up the demand for related facilities such as wind turbine, foundations, and vessels.
Investment Actions
We initiate on Ezion with a “Buy” rating and a target price of SG$0.48 based on discounted free cash flow to firm (FCFF) valuation with weighted average cost of capital (WACC) of 8.9%.
Company Background
To diversify the product mix, Ezion has entered the non-traditional energy market like offshore wind. Apart from redeploying service rigs in North Sea previously, in Jun-16, the group announced its entry into China’s offshore wind farm market through collaboration with two state-owned corporations in China, Sinotrans &CSC and China Huadian.
Investment Thesis
Persistent dim outlook: oil prices are not due for a sustainable recovery yet due to uncertainties of output cut
The oil rout, which started from mid of 2014, went through a price plunge from more than US$100/bbl to mid-US$20/bbl in one and a half years. Moving into 2Q16, the short-term rally that lasted for 3 months lifted the oil price (Brent) up to c.US$53/bbl. Thereafter, the price has been fluctuating between US$40/bbl and US$54/bbl since mid of 2016.
Factors impacting oil price vary, including economic growth, demographic changes, technological innovations, and so forth. Amongst all, oil supply and demand balance is the fundamental that results in price volatility and drives short-term trend (1 to 3 years). Apparently, the current supply glut is still casting an overhang on oil prices. Year to date, two impactful events- the liftings of Iran oil sanction and US crude oil export ban, had caused volatilities on supply side, and especially the former increased the uncertainty as to whether OPEC nations will be able to come to a consensus on an output cut.
According to November OPEC Monthly Oil Market Report (MOMR) 2016, the world oil demand in 2016 is estimated to be 94.4 mb/d. Deducting the supply amount of 62.48mb/d from non-OPEC and OPEC NGLs, the shortage is estimated to be 31.91 mb/d, shown in Figure 1. Energy Information Administration (EIA) revealed that OPEC crude output rose to a record of 33.64mb/d in Sep-16, as Iraq pumped at an all-time high of 4.78 mb/d and Libya reopened ports. The possible plan to cut output to between 32.5mb/d to 33mn/d will be decided at the OPEC meeting by end of November 2016. If the supply cut does not fall below 32.69 mb/d, the glut will continue based on estimated world oil demand for 2017.
Figure 1. Supply/demand balance forecast for 2017, mb/d
Source: MOMR Nov
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Guangzhi graduated from Singapore Management University with a Master degree in Applied Finance and from South China University of Technology with a Bachelor degree in Electronic Commerce.
The current sector coverages include Energy, Utilities, and Mining sectors. He has 3 years experience in equity research in both Hong Kong and Singapore market. He is the mandarin spokesperson for Phillip Securities Research in relation to China-related projects and all mandarin seminars and client events.
