Lat week, Morningstar analyst David Meats released his latest oil market update. “We have slightly lowered our 2021 demand forecast to account for the coronavirus pandemic situation in India, but 2022 demand remains unchanged and above 2019 levels. In 2023, we expect record-high global oil demand of 101.7 million barrels a day,” he says.
For the rest of 2021, the oil supply will remain constrained, following the cautiously optimistic view of OPEC+ and its plan to gradually add a supply for a rear-end 2021 recovery. Thus, there will be a continued drawdown in inventories over the next 18 months, which should push Brent prices back to $70/barrel. There are two reasons for his cautiously optimistic outlook.
First, COVD-19 cases seem to have been brought under control in India. Secondly, in much of the developed markets, the gradual pick-up in vaccination rates continues to pave the path to normalization. These factors contributed to the view of stabilizing oil demand globally and an upside bias in oil prices for the short term.
Morningstar forecasts 2022 demand to be unchanged and above pre-COVID levels. While oil supply usually lags demand, Meats expects a substantial expansion of OPEC+ volumes and more U.S. growth. In 2023, it is expected that global oil demand will reach a record-high of 101.7 million barrels a day.
What does this mean for energy stocks in Asia? Here is Morningstar’s best idea.
Best Idea in Energy
In Asia’s Large-Mid Cap, the energy sector offers the largest discount, priced at a 12% discount to our fair values. Sinopec (00386) is one of China’s national oil companies and the best energy stock idea under Morningstar’s coverage in Asia.
“Its current share price is attractive on the back of firm oil prices and recovering downstream earnings,” says Chokwai Lee, senior equity analyst at Morningstar. He believes a benign crude-oil price environment and the favorable demand-supply scenario would help alleviate cost pressures on Sinopec's downstream business. As a result, the company can effectively reduce the risk of upstream losses.
In business operations, the company has improved cost efficiency and has moved up the value chain in its petrochemical products, which brings the refiner positive returns and avoids previous losses. The spin-off of its marketing division should provide a one-time gain to Sinopec and help strengthen its financial position.
Lee highlighted the strong first-quarter earnings reported last month. “After making losses for three consecutive quarters, Sinopec's upstream segment turned around in first quarter 2021, with an operating profit up 55% year on year.”
The profit of the refining business depends largely on prices of oil input. Lee believes as oil prices normalize, the current high refining margin would not be sustainable. A longer-run margin should remain healthy, in his view. This is largely anchored by Sinopec’s leadership position and scale advantage in China.
In terms of fair value estimate, Lee prices the stock with the management’s intent in keeping dividend policy stable. “We believe our 70% payout ratio estimate is achievable, translating to a yield of about 10% for the Hshares in 2021.” The company carries a 37.8% of stock price upside from our fair value estimate of HKD 5.90 per H-share (USD 75 per ADR, CNY 4.92 per A-share). It closed on June 4 at HK$ 4.28 per H-share.
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