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Supply disappointments offset weak demand; ‘demand rationing’ prices still on the horizon
2011 oil supply growth has been dismal; oil
demand has held up; spare capacity is low
Despite a weakening macro environment, we note
that overall oil demand has been better than our
expectations at the beginning of 2011. At the same
time, non-OPEC supply is likely to be flat this year
vs. our initial expectations of 600K b/d growth. As a
result, OPEC spare capacity is currently below 1mn
b/d, in our view, while demand could pick up in
4Q11E on seasonality. This implies that a Libyan
restart would be required to supply the market, in
our view. We also note that global OECD
inventories are very low for this time of year
despite the IEA release of strategic reserves.
We forecast ‘demand rationing’ oil pricing
We reiterate our view of ‘demand rationing’ oil
price of US$130/bbl in 2013. We are, however,
moderating our forecast of the trajectory of oil
prices over the medium term owing to lower
global GDP growth and the restart of Libyan
production, with a 2012 oil price assumption of
US$120/bbl (from US$130/bbl). We maintain our
long-term Brent forecast of US$85/bbl from 2014E
onwards.
Downside risk to oil price forecasts in the
event of an economic hard landing
Key risks to our bullish call on oil could come from
lower-than-expected GDP growth. So far only the
US market appears to show meaningful demand
contraction. We think the oil market could move to
surplus if global GDP growth falls below 3% in
2012, which could lead oil prices to fall to the
marginal cost of supply (US$80-90/bbl).
ONGC, SNP, Cairn India, CNOOC, PTTEP are
key oil & gas stocks we like in Asia
We prefer the Asian E&P names either with
attractive exposure to regulatory tailwinds (ONGC,
SNP) or with a strong volume growth profile
(Cairn India, PTTEP). While overall sector EPS
earnings have moved down due to lower oil
prices, Oil India’s EPS remains unchanged as the
impact of lower oil prices is offset by lower underrecoveries.
For Sinopec, the earnings changes are
marginal, in our view, owing to its regulated
refining business. We remove PTR (H) off the
Conviction List but maintain our Sell rating. Weak
oil prices and regulatory headwinds are key risks.
Since beginning of 2011, oil demand has surprised to the upside, supply to the downside
We note that the since the end of 2010, the IEA (a good proxy for market expectations, in our view) has revised up its 2011 global oil
demand forecasts by 530K b/d despite recent disappointing economic data. Almost all of this upward revision (500 Kb/d) is due to a
revision of the 2010 demand base, but we note that the yoy increase in 2011 vs. 2010 has not been meaningfully revised down.
Russia, with its regulated pricing, has seen the greatest positive demand revisions, followed by Japan due to the shutdown of its
nuclear power generation capacity. Unsurprisingly, the US has seen the greatest negative demand revisions, which we believe
could continue further following the recent c.400Kb/d downward revision to US July demand data by the EIA. Partly as a result of
this recent US revision, our 2011 oil demand estimates are now just over 60kbpd lower than the IEA
At the same time, non-OPEC supply has meaningfully disappointed to the downside
The opposite can be said for non-OPEC supply where high maintenance, unexpected downtime, and delays in new projects have led
the IEA to revise its non-OPEC supply growth figures down by 600Kb/d since the end of 2010 (with 250 Kb/d coming from a
downward revision of the 2010 production base). Overall, in just 10 months the IEA’s expectation for OPEC spare capacity (excluding
Libya changes) has decreased by a material 1.1mbpd. We believe that the IEA still needs to meaningfully revise down its supply
estimates (we are 126Kb/d below).
Canada and the US have seen the largest positive revisions for supply, while biofuel production and processing gains have seen
negative revisions. Within the rest of world, the UK is likely to have contributed to part of the downgrade given the level of
maintenance and unexpected downtime in the North Sea over the summer. Our non-OPEC supply estimates are now 126Kb/d below
IEA expectations for 2011 as we expect UK, Norway, and Brazil to continue to disappoint.
OPEC spare capacity is dangerously thin; a resumption of the Libyan exports is needed
We believe effective OPEC spare capacity (i.e., excluding Libya and Nigeria shut-in production and Saudi Arabia over 10mn b/d)
should remain below 1mn b/d in 2012E and 2013E despite allowing for a relatively strong resumption in Libyan production (50% of
capacity restart in 2012; 75% in 2013). The word “effective” could be key, as, in our view, spare capacity that cannot be used to
produce is not relevant. This could be a result of geopolitical constraints, decline rates, or for security reasons. Exhibit 6 shows our
estimate of OPEC spare capacity using two definitions: (1) total capacity, which is comparable to the figure used by most oil market
observers and the media; (2) effective spare capacity, which excludes the production shut-in in Nigeria for security reasons, the
Libyan production that does not resume, and incremental Saudi Arabian production over 10.5mn b/d.
..but history has shown that supply disruptions could take a long time to fix
We assume that Libyan production resumes relatively swiftly, with 50% utilization in 2012 and 75% utilization in 2013. However, if
the experience of companies operating in Nigeria and the geopolitical challenges in Venezuela serve as our guide, the path back for
Libyan oil production could be difficult, in our view. Note that in Iran and Iraq from the late 1970s/1980s and in Venezuela over the
past decade, the “disrupted” supply did not return to original levels
We reiterate our US$130/bbl oil price forecast for 2013, but expect a more gradual path
We estimate that with OPEC effective spare capacity remaining at or below 1mn b/d, the oil price levels are likely to remain high to
control demand and volatility could also be elevated, with a skew to the upside in the event of major supply disruptions. While we
believe that demand rationing pricing of around US$130/bbl would be needed, we are, however, moderating our trajectory due to
lower global GDP growth than we previously expected (3.5% in 2012E vs. 4.2% earlier), with a 2012 oil price assumption of
US$120/bbl (down from US$130/bbl).
Key risks to our bullish call on crude could come from lower-than-expected GDP growth. So far only the US is showing meaningful
demand contraction. We think the oil market would move to surplus if global GDP growth was below 3% in 2012. This could lead the
oil price to the marginal cost of supply (US$80-90/bbl).
New oil price deck drives earnings and target price changes in our Asian oils coverage
We prefer ONGC (Buy, Conviction list), Cairn India (Buy), CNOOC (Buy), Sinopec (Buy) and PTTEP (Buy) over PetroChina (Sell)
and Oil India (Sell) in the region. We also remove PetroChina (H) from the Conviction List, but maintain our Sell rating given
relatively lower potential upside compared to the rest of our coverage universe. We revise our 12-month target prices and estimates
following our new oil price deck changes, with the magnitude governed by the EPS sensitivity to oil price changes for each, as well
as the regulatory framework of each country.
ONGC – Reducing estimates marginally; reiterate CL-Buy
We revise our EPS estimates for FY12E and FY13E by -3% and -4%, respectively, to reflect lower earnings from ONGC’s overseas
operations that are levered to oil prices, partly offset by a lower share in under-recoveries on account of lower oil prices. We
continue to like ONGC owing to stable to improving oil realizations, improving volume growth, and inexpensive valuation (ONGC is
trading at FY12E EV/DACF of 5.1X vs an eight-year historical range of 4.0X-9.5X). We maintain our 12-month Director’s Cut-based
target price on ONGC of Rs330.
Risks --- Adverse policy actions on fuel pricing resulting in higher subsidy burden and lower-than-expected production from legacy
E&P fields.
Cairn India – Lowering estimates; reiterate CL-Buy
We revise our EPS estimates for both FY12E and FY13E by 6% to reflect lower oil price realizations and consequently revise our 12-
m NAV-based TP to Rs351 from Rs360. The key upside catalyst for the stock over the medium term could come from moving to a
going concern valuation from the current asset-based valuation, in our view. In order for this to occur, we would need further clarity
on: 1) reserve replacement; 2) diversification of asset base; and 3) sustainability of production profile.
Risks --- Delays in Rajasthan ramp-up and any adverse regulatory developments.
Sinopec – Defensive stock with steady earnings amid lower oil price; top pick in China; Buy
We are revising down our FY2012E EPS by -2% on the back of our revised Brent oil price forecasts and updated Chinese refining
margins. Consequently, we raise our 12-month Director’s Cut-based target price on Sinopec to HK$10.50/Rmb11.50/US$132 for
H/A/ADS shares (vs. previous HK$9.60/Rmb10.50/US$122). Sinopec is attractively positioned for any regulatory tailwind in terms of
reforms in refined product pricing, in our view. Furthermore, we believe Sinopec is a defensive name to own for its large regulated
refining business, should oil prices spike to demand rationing levels. Sinopec is our top pick in China oils coverage. We maintain our
Buy ratings on the stock given 37%/66%/38% potential upsides for the H/A/ADS shares to our new target prices.
Risks --- A sharp crude oil price spike without product price increases and any major project delays.
CNOOC – Lowering target price on lower oil price forecasts; maintain Buy
We are revising our EPS estimates for FY11E-FY13E by -7% to +2% to reflect our revised Brent oil price forecasts. Consequently, we
cut our 12-month Director’s Cut-based target price on CNOOC to HK$20.30/US$260 for H/ADR shares (vs. previous
HK$22.50/US$287). Despite recent disappointments in volume growth from the Bohai Bay spills and the delay in closing the Bridas
transaction (CNOOC’s volume growth outlook for 2011 has come down meaningfully), we note that 2012E organic growth outlook
remains largely intact. We also note that while CNOOC’s 2012E CROCI is lower than in 2011E, it still remains much higher than the
other two Chinese oil majors. Our target price implies 56%/62% potential upsides for H/ADR shares from current levels.
Risks --- A sharp oil price pullback, operational risks, and major project delays.
PTTEP – Oil sands drag on returns priced in, strong 2012E volume outlook; maintain Buy
We see strong volume growth potential – PTTEP is guiding for a strong 14% yoy growth in 2012 production as new projects
come online (i.e., Vietnam 16-1, Montara, and Bongkot South). So far, these new projects appear to be on track as planned (in fact,
Vietnam 16-1 has already started production on August). We expect (1) Potential reserve upgrades – PTTEP has not yet booked
any reserves from its newly acquired Canada Oil Sands acquisition, but we believe that the company may do so at the end of 2011E
with more extensive drilling there. So far no reserve estimates have been issued, but according to PTTEP the resources are
estimated at 4.3bn bbls (PTTEP has 40% stake). PTTEP's current proved reserves are 1.04bn bbls. (2) Longer-term exploration
opportunities in Cambodia – Thailand's new government has resumed discussions with Cambodia to jointly develop an
overlapping maritime petroleum resource (the MoU was first signed in 2001, but was cancelled by the previous Thai government in
2009), and PTTEP may have opportunities to participate. At US$4.9/boe in 2011E, PTTEP has one of the lowest production costs in
the region and we believe this should cushion the risk of a potential downturn in oil prices. We are lowering our 2011E-2013E EPS
estimates by 3%/9%/3% on lower oil prices, and consequently are lowering our 12-month Director’s Cut-based target price to Bt191
(from Bt210). Reiterate Buy.
Risks --- If production is below our expectations. In particular, we have already assumed Montara start-up in 2Q12 (vs. the
company’s expectation of 1Q12), but if that is delayed further there could be downside risks to our forecasts. Lower-than-expected
oil prices.
INPEX – Lowering target price; maintain Buy
We revise down our 2011E-2013E EPS by 9%/14%/7% due to the strong yen and new forecast on oil prices. We also cut our 12-
month Director’s Cut-based target price on INPEX to ¥625,000 from ¥680,000 due to the change in base year and our oil price
forecasts. Although earnings are sensitive to oil prices and forex in the short term, we have to take account of development plans
when evaluating INPEX. We expect news flow on the progress in the Ichthys project (INPEX is the operator) to be factored into the
share price, though the operating startup is more than five years away per the company. We maintain our Buy rating on the stock
given 29% upside potential to our new target price.
Risks --- Fall in crude oil prices, delays/suspension for promising projects such as Ichthys, global economic slump, yen appreciation.
PTT – NGV/LPG reform unlikely in the near term, lowering target price; Neutral
While we are positive on oil prices, we believe investors can gain direct exposure to PTT’s upstream via PTTEP. Our recent meetings
with energy companies in Thailand indicate some optimism on LPG/NGV price deregulation (currently price capped), but we believe
this is unlikely in the near term as it could raise fuel prices and stoke inflation. If LPG and NGV prices are fully floated, we believe
that PTT's 2012E EPS could be 14% and 3% higher, respectively. We are lowering our 2011E-2013E EPS estimates by 0.4 to 8%
mainly on the lower oil price forecasts. With the earnings revisions, we cut our 12-month target price to Bt295 (from Bt350) based on
an 11% discount to SOTP (unchanged). We maintain our Neutral rating.
Risks --- Higher-/lower-than-expected gross refining margins (GRM), deregulation of NGV prices, and stronger-/weaker-thanexpected
oil prices.
PetroChina – Raising target price; off Conviction List but maintain Sell
We are revising down our FY2012E EPS by -3% on the back of our revised Brent oil price forecasts and updated Chinese refining
margins. Consequently, we raise our 12-month Director’s Cut-based target price on PetroChina to HK$10.10/Rmb10.85/US$130 for
H/A/ADR (vs. previous HK$9.40/Rmb10.10/US$122). PTR is our least preferred stock due to its unattractive risk-reward profile from
falling cash returns, rising losses from natural gas imports, expensive valuations (2012E EV/DACF of 5.5x vs 4.1x for Sinopec and
3.7x for CNOOC), and already priced in oil leverage and natural gas price hike. We remove PetroChina (H) from our Conviction List
as the stock has neared our target price and key catalysts such as earnings disappointment have played out. We maintain our Sell
ratings on the stocks, given relatively lower potential upsides compared to the rest of our coverage universe. Since we added it to
the Conviction List on May 3, 2011, PetroChina (H) shares have declined 12% vs MSCI China -29% (last twelve months +7% vs MSCI
China -26%).
Risks --- A sharp oil price rally and faster/higher-than-expected gas price hikes.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Supply disappointments offset weak demand; ‘demand rationing’ prices still on the horizon
2011 oil supply growth has been dismal; oil
demand has held up; spare capacity is low
Despite a weakening macro environment, we note
that overall oil demand has been better than our
expectations at the beginning of 2011. At the same
time, non-OPEC supply is likely to be flat this year
vs. our initial expectations of 600K b/d growth. As a
result, OPEC spare capacity is currently below 1mn
b/d, in our view, while demand could pick up in
4Q11E on seasonality. This implies that a Libyan
restart would be required to supply the market, in
our view. We also note that global OECD
inventories are very low for this time of year
despite the IEA release of strategic reserves.
We forecast ‘demand rationing’ oil pricing
We reiterate our view of ‘demand rationing’ oil
price of US$130/bbl in 2013. We are, however,
moderating our forecast of the trajectory of oil
prices over the medium term owing to lower
global GDP growth and the restart of Libyan
production, with a 2012 oil price assumption of
US$120/bbl (from US$130/bbl). We maintain our
long-term Brent forecast of US$85/bbl from 2014E
onwards.
Downside risk to oil price forecasts in the
event of an economic hard landing
Key risks to our bullish call on oil could come from
lower-than-expected GDP growth. So far only the
US market appears to show meaningful demand
contraction. We think the oil market could move to
surplus if global GDP growth falls below 3% in
2012, which could lead oil prices to fall to the
marginal cost of supply (US$80-90/bbl).
ONGC, SNP, Cairn India, CNOOC, PTTEP are
key oil & gas stocks we like in Asia
We prefer the Asian E&P names either with
attractive exposure to regulatory tailwinds (ONGC,
SNP) or with a strong volume growth profile
(Cairn India, PTTEP). While overall sector EPS
earnings have moved down due to lower oil
prices, Oil India’s EPS remains unchanged as the
impact of lower oil prices is offset by lower underrecoveries.
For Sinopec, the earnings changes are
marginal, in our view, owing to its regulated
refining business. We remove PTR (H) off the
Conviction List but maintain our Sell rating. Weak
oil prices and regulatory headwinds are key risks.
Since beginning of 2011, oil demand has surprised to the upside, supply to the downside
We note that the since the end of 2010, the IEA (a good proxy for market expectations, in our view) has revised up its 2011 global oil
demand forecasts by 530K b/d despite recent disappointing economic data. Almost all of this upward revision (500 Kb/d) is due to a
revision of the 2010 demand base, but we note that the yoy increase in 2011 vs. 2010 has not been meaningfully revised down.
Russia, with its regulated pricing, has seen the greatest positive demand revisions, followed by Japan due to the shutdown of its
nuclear power generation capacity. Unsurprisingly, the US has seen the greatest negative demand revisions, which we believe
could continue further following the recent c.400Kb/d downward revision to US July demand data by the EIA. Partly as a result of
this recent US revision, our 2011 oil demand estimates are now just over 60kbpd lower than the IEA
At the same time, non-OPEC supply has meaningfully disappointed to the downside
The opposite can be said for non-OPEC supply where high maintenance, unexpected downtime, and delays in new projects have led
the IEA to revise its non-OPEC supply growth figures down by 600Kb/d since the end of 2010 (with 250 Kb/d coming from a
downward revision of the 2010 production base). Overall, in just 10 months the IEA’s expectation for OPEC spare capacity (excluding
Libya changes) has decreased by a material 1.1mbpd. We believe that the IEA still needs to meaningfully revise down its supply
estimates (we are 126Kb/d below).
Canada and the US have seen the largest positive revisions for supply, while biofuel production and processing gains have seen
negative revisions. Within the rest of world, the UK is likely to have contributed to part of the downgrade given the level of
maintenance and unexpected downtime in the North Sea over the summer. Our non-OPEC supply estimates are now 126Kb/d below
IEA expectations for 2011 as we expect UK, Norway, and Brazil to continue to disappoint.
OPEC spare capacity is dangerously thin; a resumption of the Libyan exports is needed
We believe effective OPEC spare capacity (i.e., excluding Libya and Nigeria shut-in production and Saudi Arabia over 10mn b/d)
should remain below 1mn b/d in 2012E and 2013E despite allowing for a relatively strong resumption in Libyan production (50% of
capacity restart in 2012; 75% in 2013). The word “effective” could be key, as, in our view, spare capacity that cannot be used to
produce is not relevant. This could be a result of geopolitical constraints, decline rates, or for security reasons. Exhibit 6 shows our
estimate of OPEC spare capacity using two definitions: (1) total capacity, which is comparable to the figure used by most oil market
observers and the media; (2) effective spare capacity, which excludes the production shut-in in Nigeria for security reasons, the
Libyan production that does not resume, and incremental Saudi Arabian production over 10.5mn b/d.
..but history has shown that supply disruptions could take a long time to fix
We assume that Libyan production resumes relatively swiftly, with 50% utilization in 2012 and 75% utilization in 2013. However, if
the experience of companies operating in Nigeria and the geopolitical challenges in Venezuela serve as our guide, the path back for
Libyan oil production could be difficult, in our view. Note that in Iran and Iraq from the late 1970s/1980s and in Venezuela over the
past decade, the “disrupted” supply did not return to original levels
We reiterate our US$130/bbl oil price forecast for 2013, but expect a more gradual path
We estimate that with OPEC effective spare capacity remaining at or below 1mn b/d, the oil price levels are likely to remain high to
control demand and volatility could also be elevated, with a skew to the upside in the event of major supply disruptions. While we
believe that demand rationing pricing of around US$130/bbl would be needed, we are, however, moderating our trajectory due to
lower global GDP growth than we previously expected (3.5% in 2012E vs. 4.2% earlier), with a 2012 oil price assumption of
US$120/bbl (down from US$130/bbl).
Key risks to our bullish call on crude could come from lower-than-expected GDP growth. So far only the US is showing meaningful
demand contraction. We think the oil market would move to surplus if global GDP growth was below 3% in 2012. This could lead the
oil price to the marginal cost of supply (US$80-90/bbl).
New oil price deck drives earnings and target price changes in our Asian oils coverage
We prefer ONGC (Buy, Conviction list), Cairn India (Buy), CNOOC (Buy), Sinopec (Buy) and PTTEP (Buy) over PetroChina (Sell)
and Oil India (Sell) in the region. We also remove PetroChina (H) from the Conviction List, but maintain our Sell rating given
relatively lower potential upside compared to the rest of our coverage universe. We revise our 12-month target prices and estimates
following our new oil price deck changes, with the magnitude governed by the EPS sensitivity to oil price changes for each, as well
as the regulatory framework of each country.
ONGC – Reducing estimates marginally; reiterate CL-Buy
We revise our EPS estimates for FY12E and FY13E by -3% and -4%, respectively, to reflect lower earnings from ONGC’s overseas
operations that are levered to oil prices, partly offset by a lower share in under-recoveries on account of lower oil prices. We
continue to like ONGC owing to stable to improving oil realizations, improving volume growth, and inexpensive valuation (ONGC is
trading at FY12E EV/DACF of 5.1X vs an eight-year historical range of 4.0X-9.5X). We maintain our 12-month Director’s Cut-based
target price on ONGC of Rs330.
Risks --- Adverse policy actions on fuel pricing resulting in higher subsidy burden and lower-than-expected production from legacy
E&P fields.
Cairn India – Lowering estimates; reiterate CL-Buy
We revise our EPS estimates for both FY12E and FY13E by 6% to reflect lower oil price realizations and consequently revise our 12-
m NAV-based TP to Rs351 from Rs360. The key upside catalyst for the stock over the medium term could come from moving to a
going concern valuation from the current asset-based valuation, in our view. In order for this to occur, we would need further clarity
on: 1) reserve replacement; 2) diversification of asset base; and 3) sustainability of production profile.
Risks --- Delays in Rajasthan ramp-up and any adverse regulatory developments.
Sinopec – Defensive stock with steady earnings amid lower oil price; top pick in China; Buy
We are revising down our FY2012E EPS by -2% on the back of our revised Brent oil price forecasts and updated Chinese refining
margins. Consequently, we raise our 12-month Director’s Cut-based target price on Sinopec to HK$10.50/Rmb11.50/US$132 for
H/A/ADS shares (vs. previous HK$9.60/Rmb10.50/US$122). Sinopec is attractively positioned for any regulatory tailwind in terms of
reforms in refined product pricing, in our view. Furthermore, we believe Sinopec is a defensive name to own for its large regulated
refining business, should oil prices spike to demand rationing levels. Sinopec is our top pick in China oils coverage. We maintain our
Buy ratings on the stock given 37%/66%/38% potential upsides for the H/A/ADS shares to our new target prices.
Risks --- A sharp crude oil price spike without product price increases and any major project delays.
CNOOC – Lowering target price on lower oil price forecasts; maintain Buy
We are revising our EPS estimates for FY11E-FY13E by -7% to +2% to reflect our revised Brent oil price forecasts. Consequently, we
cut our 12-month Director’s Cut-based target price on CNOOC to HK$20.30/US$260 for H/ADR shares (vs. previous
HK$22.50/US$287). Despite recent disappointments in volume growth from the Bohai Bay spills and the delay in closing the Bridas
transaction (CNOOC’s volume growth outlook for 2011 has come down meaningfully), we note that 2012E organic growth outlook
remains largely intact. We also note that while CNOOC’s 2012E CROCI is lower than in 2011E, it still remains much higher than the
other two Chinese oil majors. Our target price implies 56%/62% potential upsides for H/ADR shares from current levels.
Risks --- A sharp oil price pullback, operational risks, and major project delays.
PTTEP – Oil sands drag on returns priced in, strong 2012E volume outlook; maintain Buy
We see strong volume growth potential – PTTEP is guiding for a strong 14% yoy growth in 2012 production as new projects
come online (i.e., Vietnam 16-1, Montara, and Bongkot South). So far, these new projects appear to be on track as planned (in fact,
Vietnam 16-1 has already started production on August). We expect (1) Potential reserve upgrades – PTTEP has not yet booked
any reserves from its newly acquired Canada Oil Sands acquisition, but we believe that the company may do so at the end of 2011E
with more extensive drilling there. So far no reserve estimates have been issued, but according to PTTEP the resources are
estimated at 4.3bn bbls (PTTEP has 40% stake). PTTEP's current proved reserves are 1.04bn bbls. (2) Longer-term exploration
opportunities in Cambodia – Thailand's new government has resumed discussions with Cambodia to jointly develop an
overlapping maritime petroleum resource (the MoU was first signed in 2001, but was cancelled by the previous Thai government in
2009), and PTTEP may have opportunities to participate. At US$4.9/boe in 2011E, PTTEP has one of the lowest production costs in
the region and we believe this should cushion the risk of a potential downturn in oil prices. We are lowering our 2011E-2013E EPS
estimates by 3%/9%/3% on lower oil prices, and consequently are lowering our 12-month Director’s Cut-based target price to Bt191
(from Bt210). Reiterate Buy.
Risks --- If production is below our expectations. In particular, we have already assumed Montara start-up in 2Q12 (vs. the
company’s expectation of 1Q12), but if that is delayed further there could be downside risks to our forecasts. Lower-than-expected
oil prices.
INPEX – Lowering target price; maintain Buy
We revise down our 2011E-2013E EPS by 9%/14%/7% due to the strong yen and new forecast on oil prices. We also cut our 12-
month Director’s Cut-based target price on INPEX to ¥625,000 from ¥680,000 due to the change in base year and our oil price
forecasts. Although earnings are sensitive to oil prices and forex in the short term, we have to take account of development plans
when evaluating INPEX. We expect news flow on the progress in the Ichthys project (INPEX is the operator) to be factored into the
share price, though the operating startup is more than five years away per the company. We maintain our Buy rating on the stock
given 29% upside potential to our new target price.
Risks --- Fall in crude oil prices, delays/suspension for promising projects such as Ichthys, global economic slump, yen appreciation.
PTT – NGV/LPG reform unlikely in the near term, lowering target price; Neutral
While we are positive on oil prices, we believe investors can gain direct exposure to PTT’s upstream via PTTEP. Our recent meetings
with energy companies in Thailand indicate some optimism on LPG/NGV price deregulation (currently price capped), but we believe
this is unlikely in the near term as it could raise fuel prices and stoke inflation. If LPG and NGV prices are fully floated, we believe
that PTT's 2012E EPS could be 14% and 3% higher, respectively. We are lowering our 2011E-2013E EPS estimates by 0.4 to 8%
mainly on the lower oil price forecasts. With the earnings revisions, we cut our 12-month target price to Bt295 (from Bt350) based on
an 11% discount to SOTP (unchanged). We maintain our Neutral rating.
Risks --- Higher-/lower-than-expected gross refining margins (GRM), deregulation of NGV prices, and stronger-/weaker-thanexpected
oil prices.
PetroChina – Raising target price; off Conviction List but maintain Sell
We are revising down our FY2012E EPS by -3% on the back of our revised Brent oil price forecasts and updated Chinese refining
margins. Consequently, we raise our 12-month Director’s Cut-based target price on PetroChina to HK$10.10/Rmb10.85/US$130 for
H/A/ADR (vs. previous HK$9.40/Rmb10.10/US$122). PTR is our least preferred stock due to its unattractive risk-reward profile from
falling cash returns, rising losses from natural gas imports, expensive valuations (2012E EV/DACF of 5.5x vs 4.1x for Sinopec and
3.7x for CNOOC), and already priced in oil leverage and natural gas price hike. We remove PetroChina (H) from our Conviction List
as the stock has neared our target price and key catalysts such as earnings disappointment have played out. We maintain our Sell
ratings on the stocks, given relatively lower potential upsides compared to the rest of our coverage universe. Since we added it to
the Conviction List on May 3, 2011, PetroChina (H) shares have declined 12% vs MSCI China -29% (last twelve months +7% vs MSCI
China -26%).
Risks --- A sharp oil price rally and faster/higher-than-expected gas price hikes.
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