O&M

O&M: Although WTI rallied to US$37.35/bbl after breaching below the US$35 mark a few days ago, the weakness is far from over.

A foreign broker argues that prices may fall into the high US$20s if storage tanks fill up before producers sufficiently cut output. The house opines this scenario may occur in 1H16.

U.S. crude stockpiles are now 120m barrels above the five-year seasonal average, and outlook ahead appears more bearish. This is as stubborn OPEC’s refusal to budge on output and US shale’s surprising resilience meets the return of Iranian oil, as sanctions gets lifted.

Another downside risk to oil price is the upside risk of the USD, which may happen if the Fed raises rates in the FOMC meeting this week.

For the O&M sector, Maybank-KE does not see a turn in the near term. In fact, it foresees further spending cuts in 2016. Also, even if oil prices rise to US$60-70/barrel, oil companies will first need to first mend their balance sheets before resuming spending.

Post 3Q15 results, Maybank-KE’s EPS forecasts are 7-8% below consensus. Ezion (Buy, TP: $1.28) is the preferred counter for exposure, while top Sells include SMM (TP: $1.75) and Vard (TP: $0.22)