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Poor outlook. Panelists at the 14th Asian Oil & Gas Conference 2009
(AOGC) generally concurred with our views on declining E&P spending
as well as project cancellations, delays and replenishment risks as the
oil and gas sector navigates the global economic slowdown and
financial crisis. We maintain Underweight.
IEA says 2009 E&P spend collapsed by 21%. International Energy
Agency (IEA) director Nobuo Tanaka said E&P spending has fallen
21% to USD375b, USD25b worse than our assessment. Planned O&G
projects involving a total 2.0m bpd of oil and 1b cu ft / day of gas supply
were cancelled over the past 6 months. A further 35 projects affecting
4.2m bpd of oil and 2.3b cu ft / day were delayed by at least 18 months.
Industry is in consolidation. PETRONAS Chairman Hassan Marican
said small, independent and cash-strapped oil players are suffering
more than the Super majors and National Oil Companies in this
environment. He sees forced sellers among the weak players due to
cashflow and financial constraints.
Oil prices to remain volatile. Hassan Marican thinks oil prices will
remain volatile over the next few years. He questioned the foundations
of the oil price rally. Is it due to economic recovery prospects or
speculative investment in commodities on weaker USD views? He
added there is a real danger that continuing low investments could lead
to capacity shortages and another energy price spike.
Steady development needed to ease volatility. There is a need to
develop more O&G fields to moderate volatility in the industry cycle as
the current spare capacity and new output conditions indicate a repeat
of cycle volatility akin to the 1980’s. Spare crude oil capacity has been
tight, averaging 2.7m bpd over the past decade.
Maintain Underweight. We reiterate our view that values have
vanished following the recent share price run-ups. We are Sellers as
mid-cycle valuations are now reflected in the share prices of O&G
stocks. Prospects of global economic recovery remains hazy and global
oil demand needs to be sustained at a higher level of of 85-86m bpd
and move to a higher growth path to justify more expensive valuations.