In this briefing:
- NIFTY CPSE Index Review – HUGE Impact & Possibly an Upcoming FFO
- Bayan Resources – New Issue Assessment – Lucror Analytics
- Oil Macro Heavy Signals Post Tactical Recovery
- Weekly Oil Views: Caution: US-Iran Tensions Tamped Down, Not Wiped Out
Last evening, the Index Maintenance Sub-Committee of NSE Indices Limited decided to make some changes to the NIFTY CPSE index. Indian Oil Corp (IOCL IN) and Power Finance (POWF IN) are being dropped from the index, while Cochin Shipyard (COCHIN IN), Nhpc Ltd (NHPC IN), Nmdc Ltd (NMDC IN) and Power Grid Corporation Of India (PWGR IN) are being included. This takes the number of constituents from 10 to 12.
The eligibility criteria has been tweaked to include stocks having more than 51% Government holding, down from the 51.5% needed earlier.
We expect Indian Oil Corp (IOCL IN) and Power Finance (POWF IN) to trade significantly lower this week with 24 days and 17 days of average volume to sell, respectively.
While the headline days to buy on the inclusions is very big, there is a high probability of the ETF buying the shares from the Government of India at the closing price on 23 January. We do not expect the inclusion names to trade higher and any price spikes on the headlines could be sold into.
Bayan Resources is roadshowing a benchmark-size USD three-year 144A/RegS Notes offering. The Notes are expected to be rated Ba3 (stable) and BB- (stable) by Moody’s and Fitch, respectively, in line with the company’s ratings. The transaction is expected to price on or after 16 January 2020. The proceeds will be used to refinance existing credit facilities and for general corporate purposes.
We view Bayan Resources as “Medium Risk” on the LARA scale, supported by its large low-cost production, and its strong and prudent financial profile. The company has grown to be one of Indonesia’s largest coal producers by developing Tabang Mine and the associated logistics infrastructure. The mine has low (first-quartile) production cost, giving rise to strong profitability and free-cash generation even in the coal downcycle. However, the mine operations face weather-related risk, which will be mitigated with the completion of new infrastructure allowing the transport of coal via a larger waterway. The company has a track record of prudent financial policy. Additionally, it has very little debt (after repaying debt in 2017) and is committed to keeping net leverage less than a low 2.5x through the cycle.
Our Credit Bias on Bayan is “Negative”, given the sustained low coal price environment, which will likely cause the financial risk profile to deteriorate. That said, financial metrics should remain strong.
We view Bayan’s corporate governance as “Weak” on the LAGA scale, owing to the concentration of ownership in the hands of founder and President Director, Low Tuck Kwong. Moreover, there are recurring related-party transactions, which stem from coal supply arrangements with entities owned by Mr Low and KEPCO. These weaknesses are partly offset by the robust Board appointments and experienced management team.
We expect the proposed notes to price at around 5.5%.
W&T Offshore (WTI US) is resting on some interesting tactical support at 58 where the 200 day moving average and wedge price support align. This is a tactical bounce zone. Resistance comes in at 57.50/60 with scope to 62.
Our focus today is on trading a tactical rise into strategic sell territory near the Iran spike high zone. The rising wedge warns of a more macro negative cycle as does the MACD slip back below triple resistance.
MACD slipping back below macro resistance is negative and would confirm a bigger topping process (after a tactical recovery). An MACD break below trendline would also nail down a more negative macro cycle toward key support at 55 and 52 (just above the 51 triple lows).
The US and Iran last Wednesday stood down from a nerve-racking five-day escalation of tensions that had put the Middle East on high alert and sent rattled investors across the globe fleeing into safe-haven assets.
Crude had stacked on a 3-4% risk premium to hit four-month highs on Monday, which quickly fizzled out by mid-week.
But we need to be careful: The US and Iran have backed off for now, not laid down arms. The oil market may get a reminder before too long of the heightened animosity between the two countries and the fragility of the Middle East in the face of their resurgent tensions.
Will Tehran give peace a chance? If not, how might it retaliate and what are the pain points for oil? We give you our perspective.
We also revisit the other key theme that was reclaiming centre-stage in the oil market as the week drew to a close: The expected signing of the US-China phase-one trade deal next Wednesday and what comes after.