Brokers' take: Expecting oil prices to hold up, DBS recommends buying the laggards

BELIEVING oil prices could spike up again above US$80 per barrel later this year, DBS Group Research said investors should buy oil proxies, pointing out that stocks have underperformed the oil price recovery last year and that valuations "look attractive".

In a report on Thursday (Jan 13), the brokerage stated that its top picks are China National Offshore Oil Corporation (CNOOC), which is listed on the Hong Kong stock exchange, and PTT Exploration and Production (PTTEP), which is listed in Thailand.

For CNOOC, it has set a target price of HK$15, which represents a 63.9 per cent upside from its last closing price of HK$9.15. PTTEP's target price is set at 160 Thai baht, a 29 per cent upside from the counter's last closing price of 124 baht.

Apart from CNOOC and PTTEP, DBS also ascribed "buy" ratings to other upstream and integrated oil stocks, namely PetroChina, Sinopec, PTT, Thai Oil and Medco Energi Internasional.

Its analyst Suvro Sarkar said: "We continue to favour upstream companies as best proxies to ride on the oil price momentum, in particular the Chinese names, which have underperformed the regional peers despite an earlier and firmer recovery from Covid-19.

"We believe the share price rally has more legs in view of the oil price optimism."

Expounding on the brokerage's take, Sarkar said 2022 should still represent a "reasonably balanced market" as the Organization of the Petroleum Exporting Countries (Opec) and allies, known as Opec+, have surplus capacity.

However, he believes that oil prices could rise again in late 2022 and beyond as severe systemic underinvestment on the upstream side in recent years could impact non-Opec supply growth.

This favours the oil proxies, Sarkar said, as he highlighted that Chinese oil majors offer high dividend yields of 8 to 12 per cent compared to their peers' average yield of about 5 per cent.

Further noting that a potential revival to capital expenditures could also rejuvenate oil services, he said: "We would also keep a close watch for signs of emerging green shoots for the downstream oil services sectors."

Meanwhile, Sarkar pointed out that the Covid-19 situation will unlikely derail the oil demand recovery this year, as the Omicron outbreak appears to be less deadly so far.

Last December was a volatile month for oil markets, with Brent slipping below US$70 per barrel on the Omicron news, but almost all the losses had recovered since, so 2022 started on a "solid note", he noted.

"With the Omicron variant not resulting in any widespread lockdowns, overall oil demand trends look set to resume towards pre-Covid levels and should help boost oil prices again in the second half of the year," he said.

The only risk now, he stated, is China's zero-Covid tolerance and Beijing's response to the increase in cases, especially ahead of the Winter Olympics.

Unlike many other countries that have decided to "live with" Covid-19, China kept up a policy to "contain the virus", implementing strict mini lockdowns as and when there are local flare ups, he pointed out.

If cases spread or rise, lockdowns could get more intensive and widespread, and this would affect the economic growth trajectory and, in turn, oil demand, in the world's second largest consumer markets, he added.

"This could freak out oil markets and lead to oil prices testing the US$70 per barrel level again," Sarkar said.

On the supply side, Opec+ strategy, US-Iran nuclear talks and the speed of US shale recovery may all come into play at some point, but these "will be secondary" to the demand side of the picture, he added.

READ MORE:

• China CNOOC's Q3 revenue soars 64%, reaffirms green investment
• Brokers' take: DBS says oil proxies should remain in favour; raises price estimates