Oil and Gas Equipment and Services:North America active rig count continues to fall; southbound fund boosts valuation of brilliant domestic companies
As global crude oil is oversupplied, oil prices remain low. Thelatest active rig count in North America continued falling. Owingto seasonal factor, crude oil demand in 1Q is typically lower thanthe preceding 4Q, which means crude oil demand in 1Q15 islikely to be less than supply. Therefore, oversupply will continuein the short-term. Oil prices will be under pressure but withlimited downside. In contrast, domestic oil producers are lessaffected.
Sentiment for oil and gas exploitation remains poor: As ofend-March 2015, global active rig count was down by 429 units,or 14.4% YoY, to 2,557 units from 2,986 in February. US activerig count was down by 238 units, or 17.7% YoY. In Canada, thefigure fell 46.0% YoY, but stayed flat in other regions, showing oiland gas production in North America was most hard-hit amidfalling oil prices.
Sentiment for oil and gas exploitation in the US takesmonths to recover: In 2008-09, the following sequence wasobserved: Oil price peaked (2008.6) → US active rig countpeaked (2008.9) → oil prices bottomed out (2009.2) →US activerig count bottomed out (2009.6). International oil prices and theUS active rig count in the above period are similar to recentsituation. In general, US active rig count lags behind oil pricesfor 3-4 months, and the psychological barrier is at $60-70/barrel.In 1Q15, global crude oil was still oversupplied, which gives riseto high crude oil inventories. Obviously, it is difficult to take in theexcess inventory quickly in 2Q15. Ruling out the impact ofpolitics and wars, it is hard to balance market supply anddemand, at least in the short term, and it will take months toimprove the sentiment for oil and gas exploitation in the US.
Excess supply to be squeezed out through the survival ofthe fittest: According to our analysis, per unit cost for mostlisted vendors ranges between US$30-US$50/barrel, while thatfor a handful of the companies is above US$70/barrel (excludingimpairment cost). Small shale oil & gas producers could be moreadversely affected by falling oil prices, and we expectcompanies with per unit cost higher than US$60/barrel to beunder huge pressure to materially reduce production.n。
Chinese oil & gas equipment manufacturers and oilfieldservices providers are relatively less affected: Domestic oil& gas equipment and oilfield services vendors have relativelysmall exposure in the North American market, as they mainlycover traditional onshore oil & gas production areas, includingChina, Mid-Asia, Mid-East, Africa, etc, where the negative impact frommaterial oil & gas production capacity cuts in North America is relativelylimited. Compared to their North American peers, Chinese vendors faceless pressure from dividend payment.
Southbound fund boosts valuation of quality domestic companies:Given public offering fund in China could invest directly in Hong Kong stocks,the “Shanghai-Hong Kong Stock Connect” and the upcoming“Shenzhen-Hong Kong Stock Connect” will draw in new capital to raise thevaluation of brilliant companies. Oil prices showed signs of stabilization.Investors with greater risk appetite could start buying domestic oil and gasstocks and wait for the turnaround. In terms of companies with stable ordersand financially sound, our long-term hot picks remain TSC Group, HilongHldg. and SPT Energy.