Betting On Brent Rebound

If post-Covid recovery is sustainable, one of clear beneficiaries will be O&G-related sectors. If I would like to bet on this oil re-bound, I will look at Dayang Enterprise, a Malaysian-listed O&G player.

Dayang is involved in the provision of maintenance services, fabrication operations, hook-up and commissioning and chartering of marine vessels.

Directional Assumption

Long Dayang Enterprise

The Narrative

Brent has been trading in range bound since mid 2020. Momentum appears to pick up, approaching key resistance at USD46.

(Bloomberg) –Oil touched its strongest level since early September as signs that Covid-19 vaccinations in the U.S. could be underway within three weeks improved the demand outlook.

Markets broadly rallied after AstraZeneca Plc became the latest company to report a vaccine that protects most people from coronavirus. Vaccinations will “hopefully” start as soon as Dec. 11 or Dec. 12, Moncef Slaoui, head of the American government’s Operation Warp Speed vaccine acceleration program, said on CNN on Sunday. A weaker dollar also buoyed crude.

The prospect of a treatment has reshaped the oil futures curve, with nearby prices rallying more than later ones. Small pockets of the WTI curve moved into a bullish backwardation structure on Friday, and those gains continued early Monday.

Houthi rebels in Yemen, meanwhile, claimed in a statement to have struck a Saudi Aramco fuel distribution center in Jeddah on the kingdom’s west coast with a missile. Aramco didn’t immediately respond to a request for comment.

Crude has jumped around 20% in November as pharmaceutical companies made rapid progress on readying anti-virus drugs. Optimism that relief from the pandemic is in sight has seen the market look past surging infections and more lockdown measures. The U.S. is now averaging almost 110,000 more daily cases than a month ago, while the opening of a Hong Kong-Singapore travel bubble has been delayed by two weeks due to an uptick in cases in the Chinese territory.

“Positive risk sentiment, a weaker dollar and those unconfirmed missile attacks are supporting oil,” said UBS analyst Giovanni Staunovo.

Prices:

  • West Texas Intermediate for January delivery rose 1.5% to $43.04 a barrel at 10:48 a.m. in London
  • Brent for January settlement added 1.6% to $45.68 a barrel

The rapid firming of the oil futures curve is a sign that the market expects a rapid tightening of supplies ahead, RBC analysts including Michael Tran and Helima Croft wrote in a report. The move higher has been one of the largest in recent years, they said.

And there are signs that despite hits to demand in Europe and the U.S., the market is already seeing falling inventories. The amount of oil stored on tankers at sea fell to 115 million barrels last week, the lowest since April, according to Vortexa data.

Other oil-market news:

  • China is drawing down its elevated oil inventories on a combination of rebounding domestic demand and falling imports due to independent refiners using up most of their quota.
  • Abu Dhabi will invest 448 billion dirhams ($122 billion) in oil and natural gas over the next five years as it seeks to raise production capacity, even while OPEC restricts its output.
  • The pandemic-driven surge in online shopping continues to sustain diesel as a bright spot in an otherwise devastated U.S. fuel market.

Source: https://www.worldoil.com/news/2020/11/23/oil-prices-reach-three-month-high-on-improving-demand-outlook

As per management of Dayang:

Prospects
Business activities have picked up substantially in the third quarter of 2020 as per our planning schedule given the ramp-up in work orders for the Maintenance, Construction and Modifications Contract (MCM) and Topside Maintenance Services works under the Pan Hook-up and Commissioning Contract (Pan HUC). Consequently, vessel utilisation also came in stronger at 62%, compared to 52% in the second quarter and 55% in the first quarter, giving an average utilisation rate of 56% for the 9 months period in 2020. The
relatively high vessel utilisation is largely due to the business activity resumed towards its normalcy after the government began to ease the lockdown measure.

Barring any unforeseen circumstances, we are optimistic that the earnings trend will be sustainable, premised on our fairly sizable order book at an estimated value of RM3.6 billion to last us at least until 2023. Notwithstanding the volatility in oil price, we remain upbeat on the company’s future prospects as Dayang has emerged stronger after going through one of the most challenging periods over the past few years. We will continue to be vigilant and exercise due care and prudence in the running and administration of the Group’s business. We remain confident that our strong execution track record, coupled with our solid balance sheet, will help us to weather this challenging period.

Trading Strategy

Strictly for illustrative purpose. Assuming entry at $1.04, I may consider 1st level cut loss (CL)of $0.935, 2nd level CL $0.875 whilst target price – i am probably be looking at $1.20 (1st level) , $1.250 (2nd level). Think we should always aim for payout ratio of at least 1.5x and preferably target at 2.0x or more.

Possible Downside Risks

Recovery that does not materialize. Pro-longed increasing covid cases. OPEC couldn’t agree on production output. How would push for renewable by Biden administration impact on brent crude oil? Further capex cut by Petronas due to commitment to further upstream dividends to Gov to fund the ongoing stimulus packages?

Disclaimer: This post is not a trading / investment advice or endorsement. Please refer to a general disclaimer of this blog.

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