January 6, 2025 03:30 PM GMT RESEARCH Commodities The Oil Manual - Chartbook Source: Shutterstock Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision. For analyst certification and other important disclosures, r ...

V i e w p o i n t | 06 Jan 2025 05:53:44 ET │ 21 pages Middle East Economics GCC: Balancing Oil Production Cuts and Diversification CITI'S TAKE Qatar — Growth is projected to climb this year to 2.8% from an estimated 1.7% in 2024. Kuwait — We look for a moderate pick-up in activity this year with GDP growing 1.5% after an estimated 2% contraction in 2024. Oman — Economic growth is expected to accelerate to 2.3% this year from an estimated 1.7% in 2024. Bahrain — GDP growth is forecast to quicken to 2.7% thi ...

Industry and Company Overview * **Industry**: Offshore oilfield services (OFS) * **Company**: COSL (China Oilfield Services Limited) * **Analyst**: UBS * **Date**: 2 January 2025 Key Points Industry Trends 1. **Offshore OFS Utilization and Day Rates**: The offshore OFS industry has been experiencing an upcycle since 2021, driven by rising oil prices and increased capex by global oil companies. Rig utilisation rates have been high, with average day rates for jack-ups, semi-subs, and drill ships increasing annually since 2022. * [2] 2. **Global Offshore Rig Utilization**: The average utilisation rate for offshore rigs in 2024 was 79%, with jack-up utilisation experiencing a temporary decline in Q324 due to service suspensions in the Middle East, followed by a recovery in Q424. * [2] 3. **Offshore Rig Day Rates**: Day rates for offshore rigs have remained on an upward trajectory in 2024, with rates for jack-ups, semi-subs, and drill ships increasing by 12%, 8%, and 16% respectively from the end of 2023. * [2] 4. **Global Offshore OFS Demand**: Global offshore OFS demand is expected to remain solid, with day rates for jack-ups, semi-subs, and drill ships projected to increase by 6%, 9%, and 9% respectively from 2026 to 2028. * [3] 5. **Regional Variations**: The Mediterranean, Southeast Asia, and Australia have seen the fastest growth in average day rates for jack-ups in 2024. Norway has maintained high day rates for semi-subs, with the average leading edge day rate increasing by 23% YoY. * [4] 6. **Rig Suspensions in the Middle East**: Some rigs in the Middle East were suspended from service in 2024 due to service suspensions. However, new contracts have been secured for a quarter of the suspended rigs, and demand is expected to recover in 2026. * [4] 7. **Supply Gap**: UBS expects a supply gap to emerge in 2030, requiring an investment of US$250-400bn/year to fill the gap, accounting for the natural decline at mature fields and the need for new projects. * [19] COSL Analysis 1. **COSL Drilling Business**: UBS has updated its analysis of COSL's drilling business and adjusted its 2024/2025/2026 earnings estimates. The company's drilling segment is expected to experience high growth in 2025, driven by new contracts for suspended rigs and higher day rates for some of its semi-subs. * [5] 2. **COSL Earnings Estimates**: UBS has adjusted its DCF-based price target for COSL from HK$10.80 to HK$10.60, implying a 10x 2025E PE. The company's 2025 net profit growth forecast is 40%. * [5] 3. **COSL Valuation**: COSL's 2025E PE of 6.6x is below the global OFS peer average of 11.9x, and its 2025E P/BV of 0.6x is below the global OFS peer average of 1.6x. * [5] 4. **COSL Rig Contracts**: UBS has provided a detailed breakdown of COSL's rigs subject to contract changes in 2025, including new contracts for suspended rigs and higher day rates for some of its semi-subs. * [40] 5. **COSL Financials**: UBS has provided a financial overview of COSL, including revenue, EBITDA, net profit, capex, EPS, DPS, ROE, and gearing ratio. * [42] Risks 1. **Oil Prices**: COSL's share price tends to track oil prices, which could impact sentiment on the stock. 2. **Deep-water Drilling**: The market may have higher earnings expectations for COSL from deep-water drilling offshore China, which faces higher risks than shallow-water drilling. 3. **Exchange Rates**: If the US dollar appreciates against the renminbi, there could be upside risk to COSL's earnings. 4. **Large Portion of Revenue from CNOOC**: While this represents reliable revenue, there is a risk that COSL may not raise rates in line with overseas peers. * [48]

Summary of Global Oil and Gas Conference Call Industry Overview - The conference call focused on the **Global Oil and Gas** industry, providing insights into various companies within this sector. Key Companies Discussed 1. **BP** - Local Price: 379.1 GBp - Target Price: 525 GBp - Upside: 39% - Rating: Buy - 2024E P/E: 4.6x, FCF Yield: 8.7% [4][4][4] 2. **Chevron** - Local Price: 142.85 USD - Target Price: 195 USD - Upside: 37% - Rating: Buy - 2024E P/E: 8.0x, FCF Yield: 9.6% [4][4][4] 3. **ExxonMobil** - Local Price: 105.87 USD - Target Price: 147 USD - Upside: 39% - Rating: Buy - 2024E P/E: 8.1x, FCF Yield: 7.9% [4][4][4] 4. **Shell** - Local Price: 2,395 USD - Target Price: 2,800 USD - Upside: 17% - Rating: Neutral - 2024E P/E: 4.1x, FCF Yield: 16.4% [4][4][4] 5. **TotalEnergies** - Local Price: 51.89 USD - Target Price: 67.0 USD - Upside: 29% - Rating: Buy - 2024E P/E: 4.6x, FCF Yield: 10.2% [4][4][4] 6. **Eni** - Local Price: 12.72 USD - Target Price: 15.5 USD - Upside: 22% - Rating: Buy - 2024E P/E: 3.9x, FCF Yield: 8.4% [4][4][4] 7. **Equinor** - Local Price: 254.5 NOK - Target Price: 280 NOK - Upside: 10% - Rating: Neutral - 2024E P/E: 4.2x, FCF Yield: 11.0% [4][4][4] 8. **Cenovus Energy** - Local Price: 14.42 CAD - Target Price: 33 CAD - Upside: 129% - Rating: Buy - 2024E P/E: 5.0x, FCF Yield: 17.3% [4][4][4] Core Insights and Arguments - The overall sentiment in the oil and gas sector remains positive, with several companies rated as "Buy" due to their strong fundamentals and growth potential. - The projected earnings and cash flow metrics indicate a favorable outlook for many companies, with significant upside potential noted for companies like Cenovus Energy. - The analysis includes various financial metrics such as P/E ratios, FCF yields, and target prices, which are essential for evaluating investment opportunities in the sector. Additional Important Information - The report highlights the importance of free cash flow (FCF) yield as a critical metric for assessing the financial health of oil and gas companies. - The conference call also discussed macroeconomic factors affecting the oil and gas industry, including global demand trends and geopolitical risks that could impact pricing and production levels. - The data presented is based on estimates and market conditions as of December 2024, indicating the need for ongoing monitoring of the sector for potential investment opportunities and risks [4][4][4].

Summary of Key Points from the Conference Call Industry Overview - The conference call primarily discusses the **global oil market**, focusing on supply and demand dynamics, price forecasts, and geopolitical influences affecting oil production and pricing. Core Insights and Arguments 1. **Oil Demand and Supply Forecasts**: - Total oil demand is projected to average **104.4 million barrels per day (mbd)** in 2025, with a slight increase from **104.1 mbd** in 2024 [10][91]. - Total oil supply is expected to reach **105.7 mbd** in 2025, indicating a surplus of **1.2 mbd** in the market [10][91]. 2. **Brent and WTI Price Projections**: - Brent crude oil is forecasted to average **$80 per barrel** in 2024, with expectations of a decline to **$73** in 2025 and further to **$61** in 2026 [40][69]. - WTI prices are projected to follow a similar trend, with an exit price of **$64** by the end of 2025 [69]. 3. **Geopolitical Factors**: - The incoming Trump administration's policies are expected to focus on maintaining low energy prices, potentially impacting oil supply from Iran, Venezuela, and Russia [100][101]. - There is a consensus that the administration may prioritize domestic oil production increases over international supply constraints [100][101]. 4. **US Oil Production Growth**: - US total oil liquids production is projected to increase by **750 kbd** in 2024, surpassing **20 mbd** [71]. - A further increase of **670 kbd** is expected in 2025, primarily driven by the Permian Basin and Gulf of Mexico projects [71][78]. 5. **Brazilian Oil Production**: - Brazilian crude and condensate production is anticipated to rebound in 2025, with new FPSO units expected to add **590 kbd** of capacity [78]. - The market has expressed skepticism regarding the projected growth, with consensus estimates being more conservative [78]. 6. **OPEC's Role**: - OPEC's production levels are expected to remain stable, with no significant unwinding of cuts anticipated as long as market balances indicate potential weakness [84][86]. - Recent OPEC meetings have shifted expectations towards tighter global oil balances, reducing the likelihood of a price collapse [84]. Other Important Insights - **Market Sentiment**: There is a notable divergence in opinions regarding oil price forecasts among analysts, with some projecting prices as low as **$60** and others as high as **$95** for 2025 [41]. - **Inventory Trends**: OECD oil inventories have seen a decline of approximately **17 million barrels** year-to-date, indicating a tighter market despite the projected supply surplus [70]. - **Natural Gas Liquids (NGLs)**: NGL production is expected to contribute an additional **310 kbd** to overall liquids growth in 2025, highlighting its importance in the US oil landscape [55]. This summary encapsulates the critical points discussed in the conference call, providing a comprehensive overview of the current state and future outlook of the global oil market.

Summary of Integrated Oils Sector Conference Call Industry Overview - The crude oil market is facing challenges as supply growth is expected to outpace demand growth, leading to a below mid-cycle crack spread year for downstream operations [4][4] - The price forecast for Brent crude oil is set at $70 per barrel for 2025, aligning with current market strip pricing, while the 2026 base case shows a downside risk skewed towards lower prices [4][4] Key Financial Metrics - The estimated earnings per share (EPS) for Q4 are approximately 3% below market expectations, with 2025 estimates around 27% lower due to a combination of reduced crude price forecasts and lower crack spread assumptions [4][4] Company Ratings and Financial Projections - **Chevron (CVX)**: - Rating: Not Rated (NR) - 2023 Total Return of Capital Yield: 9.8% - 2025 Estimated Dividend Yield: 11.7% [11][11] - **ExxonMobil (XOM)**: - Rating: Overweight (OW) - 2023 Total Return of Capital Yield: 7.6% - 2025 Estimated Dividend Yield: 8.1% [11][11] - **Canadian Companies**: - **Crescent Point Energy (CVE)**: - Rating: Overweight (OW) - 2023 Total Return of Capital Yield: 5.2% - 2025 Estimated Dividend Yield: 6.5% [11][11] - **Suncor Energy (SU)**: - Rating: Neutral (N) - 2023 Total Return of Capital Yield: 7.3% - 2025 Estimated Dividend Yield: 5.8% [11][11] Market Positioning - Defensive positioning is recommended in the current market, favoring US companies over Canadian counterparts due to more attractive downside valuations and better free cash flow (FCF) resilience [4][4] Price and Yield Forecasts - The forecast for Brent crude oil prices includes: - Downside: $70/bbl - Base case: $80/bbl - Upside: $90/bbl [5][5] - Free Cash Flow (FCF) Yield projections for 2025 and 2026 indicate a range from 0% to 16% across various companies, with US companies generally showing stronger resilience [6][6] Additional Insights - The integrated oils sector is expected to experience a challenging environment with modest growth in both supply and demand, impacting overall profitability and investment returns [4][4] - The analysis suggests a cautious approach to investment in the sector, with a focus on companies that demonstrate strong cash flow and capital return capabilities [4][4]

Summary of Global Oil: Monthly Agency Data Snapshot (16 December 2024) Industry Overview - The report focuses on the global oil industry, providing insights into supply forecasts, production capacities, and market dynamics. Key Points Global Supply Growth Forecasts - Global supply growth forecasts have been raised by 60 thousand barrels per day (kb/d) for 2024 and 110 kb/d for 2025, reaching 590 kb/d and 1.35 million barrels per day (Mb/d) respectively [3] - OPEC+ supply forecasts for 2025 have been cut by 40 kb/d, anticipating improved compliance and reflecting recent trends in Iranian output, offset by higher supply from non-OPEC+ sources (+180 kb/d) [3] - Non-OPEC+ is expected to be the primary driver of global supply growth, with forecasts of 1.42 Mb/d in 2024 and 1.33 Mb/d in 2025 [3] OPEC Production Insights - OPEC-12 holds 5.82 Mb/d of spare capacity, with Saudi Arabia accounting for 3.26 Mb/d (56% of total spare capacity) [10] - The UAE is expected to contribute to OPEC's production capacity growth, raising its capacity to over 5 Mb/d by 2026 [13] - Limited increases in OPEC production are expected through 2030, with Saudi Arabia's production capacity projected to remain around 12 Mb/d [13] Iranian and Venezuelan Production - Iranian output forecast has been slightly lowered by 50 kb/d to an average of 3.35 Mb/d in 2025 due to uncertainties surrounding production levels [15] - Venezuelan supply is forecasted to remain stable at 0.90 Mb/d in 2024 and 0.94 Mb/d in 2025 [15] - Libyan production is expected to be stable at 1.09 Mb/d in 2024 and 1.19 Mb/d in 2025, with recent comments indicating production may have increased to 1.4 Mb/d [15] Russian Production and Exports - Russian crude exports decreased by 1% month-over-month in November to 4.82 Mb/d, with a 3% increase in exports to India offset by a 7% decrease to China [18] US Production and Drilling Activity - US drilling activity showed slight month-over-month improvement, with new wells drilled and completed up by 8 and 2 respectively [23] - The US rig count has stabilized at around 480, which is 20% below the levels seen at the beginning of 2023 [46] Demand Projections - Demand for various oil products is projected to increase gradually, with LPG and ethane expected to rise from 14.4 Mb/d in 2023 to 15.4 Mb/d in 2025 [29] - Gasoline demand is projected to peak at 27.4 Mb/d in 2025 before declining to 25.0 Mb/d by 2030 [29] OECD Inventories - OECD commercial oil inventories are projected to fluctuate, with a notable increase in stocks observed in recent months [35][48] Additional Insights - The report highlights the ongoing adjustments in production strategies among OPEC+ members and the impact of geopolitical factors on oil supply and demand dynamics. - The stability in US drilling activity suggests a cautious approach in response to market conditions, reflecting broader trends in the oil industry. This summary encapsulates the critical insights from the Global Oil: Monthly Agency Data Snapshot, providing a comprehensive overview of the current state and future outlook of the oil industry.

Summary of Key Points from the Conference Call Industry Overview - The conference call focused on the **Global Oil and Gas** industry, discussing various companies and macroeconomic factors affecting the sector [2][10]. Core Insights and Arguments - **Commodity Prices**: - Brent front month price is projected to be **$79.95** per barrel for 2024, with a forecast of **$82.18** for 2023 [9][10]. - WTI front month price is expected to be **$75.76** for 2024, with **$77.56** for 2023 [9][10]. - **Refining Margins**: - European composite margin is expected to average **6.12** in 2024, with a peak of **35.53** in 2022 [9][10]. - US composite margin is projected to be **5.84** in 2024, down from **9.04** in 2023 [9][10]. - **Market Dynamics**: - The Brent-Ural spread is forecasted to be **10.93** in 2024, indicating a significant change from previous years [9][10]. - The Asian spot price (JKM) is expected to average **11.99** in 2024, reflecting a decrease from **14.23** in 2023 [9][10]. Important but Overlooked Content - **Analyst Certifications**: The report includes a disclaimer about potential conflicts of interest due to UBS's business relationships with companies covered in the research [2][10]. - **Definitions and Metrics**: Key financial metrics such as EV/DACF, EBITDAX, and refining capacity are defined, providing clarity on the financial analysis used in the report [12][13]. Company Mentions - The report mentions several major companies in the oil and gas sector, including **BP**, **Hess Corporation**, **Shell**, and **ExxonMobil**, indicating a broad coverage of the industry [2][10]. This summary encapsulates the essential insights and data points from the conference call, providing a comprehensive overview of the current state and projections for the global oil and gas industry.

Summary of Global Oil Fundamentals Conference Call Industry Overview - The report focuses on the global oil market, specifically analyzing supply and demand dynamics for 2024 and 2025 [9][10]. Key Points Market Balance - The overall implied balance for 2024 remains unchanged at a surplus of 0.10 million barrels per day (Mb/d) [9]. - A tighter market is expected in the fourth quarter of 2024, with a projected deficit of -0.37 Mb/d due to higher demand and lower supply from OPEC+ [9]. - The 2025 market balance is forecasted to be in a surplus of 0.95 Mb/d, reduced from +1.15 Mb/d previously [9]. Demand Projections - The International Energy Agency (IEA) cut 2024 demand growth estimates by 78,000 barrels per day (kb/d) to 0.84 Mb/d, while raising 2025 growth estimates by 90 kb/d to 1.08 Mb/d [10]. - The absolute demand forecast for 2025 is slightly higher at 103.89 Mb/d, reflecting an increase of 80 kb/d [10]. - Chinese demand for 2024 remains unchanged at 0.14 Mb/d but is revised up by 30 kb/d for 2025 to 0.22 Mb/d [10]. Supply Dynamics - Non-OPEC+ supply growth estimates are unchanged at 1.48 Mb/d for both 2024 and 2025 [11]. - US supply growth for 2024 was raised by 20 kb/d to 0.71 Mb/d, while the 2025 estimate remains at 0.63 Mb/d [11]. - Canadian supply growth for 2024 was increased by 30 kb/d to 0.21 Mb/d, offset by a reduction in Brazil's projection by 20 kb/d to -45 kb/d [11]. OPEC+ Compliance and Output - OPEC+ output increased by 80 kb/d month-over-month in November, reaching 34.40 Mb/d, which is 0.68 Mb/d above the targeted level [12]. - Kazakhstan led the increase with an output rise of 0.13 Mb/d, while Iraqi compliance improved with a reduction of 50 kb/d [12]. - The IEA forecasts incremental supply from OPEC+ in 2025 driven by Kazakhstan (+0.21 Mb/d), Russia (+0.11 Mb/d), Libya (+90 kb/d), and the UAE (+60 kb/d) [12]. Additional Insights - The IEA's forecasts assume that OPEC+ cuts remain in place while still increasing crude production by 0.63 Mb/d over the next year [9]. - Global observed oil inventories fell by 39.3 million barrels month-over-month in October, with preliminary data for November indicating a rebound [9]. Conclusion - The oil market is expected to experience a mixed outlook, with a neutral stance for 2024 and a bullish perspective for 2025, driven by demand growth primarily from non-OECD countries and adjustments in OPEC+ supply [9][10].

Summary of OPEC+ Conference Call on December 5, 2024 Industry Overview - **Industry**: Oil and Gas - **Key Organization**: OPEC+ (Organization of the Petroleum Exporting Countries and its allies) Core Points and Arguments 1. **Production Cuts Extension**: OPEC+ has agreed to extend the 2.2 million barrels per day (mbd) voluntary cuts by three months, now set to last until April 1, 2025, marking the third postponement of the unwinding of cuts that have been in place for over two years [2][7][9] 2. **Phased Unwinding of Cuts**: The unwinding of the 2.2 mbd cuts will now occur over 18 months instead of 12, extending to September 2026. This adjustment is seen as marginally supportive for supply and demand balances [2][9][30] 3. **Market Surplus Projections**: The expected market surplus for 2025 has been reduced to 0.2 mbd, down from a previous estimate of 0.5 mbd. However, the surplus is projected to grow to 1.2 mbd in 2026 due to returning OPEC+ barrels and faster non-OPEC production growth [2][30][29] 4. **Oil Price Forecast**: The Brent crude oil price forecast remains at USD 70 per barrel for 2025 and beyond, indicating a stable outlook despite the production adjustments [2] 5. **Spare Capacity**: OPEC+ is expected to have considerable spare capacity of around 5.2 mbd by the end of 2026, which is above long-term averages. This indicates that the group may struggle to unwind cuts effectively due to non-OPEC production growth outpacing demand [2][30] 6. **Iran's Role**: The potential for reduced Iranian oil exports due to stricter sanctions under a new US administration is seen as a wildcard that could provide OPEC+ with some leeway to increase its output [2][30] Additional Important Content 1. **Compliance Improvements**: Recent improvements in compliance by Iraq and alignment from the UAE regarding production increases have helped maintain cohesion within OPEC+ [2][30] 2. **Production Baseline Discussions**: Discussions on production baselines have been postponed from November 2025 to November 2026, indicating ongoing complexities in managing production levels [2][9] 3. **Monthly Production Increases**: The monthly increases in production from the OPEC+ "Voluntary Eight" have been adjusted to 120,000 barrels per day, down from 180,000 previously, reflecting a more cautious approach to output increases [30][32] 4. **Impact of Non-OPEC Production**: Non-OPEC production is expected to grow faster than demand over the next two years, which poses a challenge for OPEC+ in managing its output effectively [2][30] This summary encapsulates the key discussions and implications from the OPEC+ conference call, highlighting the strategic decisions made regarding production cuts and the anticipated market dynamics in the oil industry.