Energy Sector

In this briefing:

1. SPINOFF:  Xinyi Solar Spinoff of Xinyi Energy
2. Weekly Oil Views: Crude’s Fear Premium Looks Iffy but Supply Slumps Are Real
3. M&A LNG Theme Back in the Spotlight with Total’s Entry in Mozambique LNG
4. Bristow – Is There an Opportunity to Invest Prior to the Financial Restructuring?
5. Xinyi Energy (信义能源) IPO: An Overvalued Deal Disguised by High Dividend

1. SPINOFF:  Xinyi Solar Spinoff of Xinyi Energy

XSH is spinning off its subsidiary Xinyi Energy Holdings Ltd (3868 HK).

According to the prospectus, XEH will issue 1.88bn – or up to 2.165bn (inclusive of the over-allotment) new shares, at an issue price between HK$1.89-$2.35/share, raising US$456mn-US$652mn. After the listing, XSH will hold ~53.7%. 

My interest is whether these spin-offs create new parent/subsidiary relationships leading to relative value trade ideas going forward, which will be dependent on the spin-off’s liquidity and the % market cap held by the parent.

Using available information from the prospectus/red herrings and various HKEx announcements, it is also possible to back out a rudimentary implied stub value of the unlisted parent’s operations ahead of these spin-offs.

At between 35-45% of Xinyi Solar market cap, this will be a new Holdco/subsidiary relationship to follow, depending on XEH’s volume.

Discussion of the spinoff and stub valuations continues below.

2. Weekly Oil Views: Crude’s Fear Premium Looks Iffy but Supply Slumps Are Real

Two main developments have been driving short-term sentiment in crude — US-China trade tensions and the Middle East geopolitical tensions — and oil market participants don’t have a clue on what to expect on either front.

There may be a $2-3/barrel fear premium in Brent on account of last week’s attacks on Saudi oil tankers and an oil pipeline, both allegedly the handiwork of Iran. However, US President Donald Trump was trying to defuse the tension by the end of last week, saying he is looking to negotiate not go to war with Iran. We expect the political temperature in the Middle East to cool down quickly, taking the fear premium with it.

On the US-China trade war front, continuing rhetoric and smoke signals instead of reports of concrete action will likely keep the world guessing. We expect the situation to keep a lid on oil prices while adding to the volatility.

The IEA, OPEC and the US EIA have all lowered their 2019 global oil demand growth forecasts in the past two months. However, it would be dangerous for the OPEC/non-OPEC ministers gathering in Vienna next month to roll over their pledged 1.2 million b/d of output cuts into the second half of the year. Even if Saudi Arabia and a couple of other countries exceeding their cuts pledge to ratchet up production in line with their quotas, they would fall well short of compensating the exports already being lost from Venezuela and Iran, flinging the market into severe supply tightness.

3. M&A LNG Theme Back in the Spotlight with Total’s Entry in Mozambique LNG

This insight has been produced in collaboration with Anish Kapadia as a joint effort of the Smartkarma Energy and Commodities Team.

With the acquisition of Anadarko Petroleum (APC US) ’s African assets from Occidental Petroleum (OXY US) for $8.8bn, Total Sa (FP FP) is adding a new LNG export position in East Africa to its growing global LNG portfolio. The acquired assets also include high-quality low cost producing fields offshore Ghana.

Total has been one of the most aggressive oil majors pursuing countercyclical upstream M&A during the oil downturn to expand its resource base at low cost. Is the French major paying a reasonable price for Anadarko’s assets?

The ongoing “re-gasification” of the oil majors’ portfolios is underpinning a growing interest among LNG buyers and portfolio players for quality LNG assets. Total’s entry in the prolific East Africa gas play is the latest example highlighting the LNG “theme” as one of the main strategic drivers of recent and likely future M&A activity in the oil and gas industry.

4. Bristow – Is There an Opportunity to Invest Prior to the Financial Restructuring?

We believe that Bristow’s senior secured bonds are overvalued at current levels of ~ 86% and would be better BUYERS in the low 60’s based on our valuation.

Accordingly, our analysis suggests that the value breaks in the senior secured part of the capital structure and we expect recoveries on the unsecured bonds to be close to zero.

5. Xinyi Energy (信义能源) IPO: An Overvalued Deal Disguised by High Dividend

Xinyi Energy, the subsidiary holding solar assets of Xinyi Solar Holdings (968 HK), started book building today. In our previous insights, we have discussed the company’s fundamentals, and the valuation based on future cash flow. In this insight, we will provide our final view on the deal.

Our previous coverage on Xinyi Energy

• Xinyi Energy (信义能源) IPO: AssetCo that Depends on Parent Injection
• Xinyi Energy (信义能源) IPO: High Dividend Yield but Depreciating Asset
• Xinyi Energy (信义能源) IPO: Value the Long Term Cashflow (Part 3)

In this briefing:

1. Special Briefing: Implications of US Ending Iran Oil Sanction Waivers

1. Special Briefing: Implications of US Ending Iran Oil Sanction Waivers

President Donald Trump caught the oil market by surprise on Monday by declaring that the US will end all Iran sanction waivers after May 2.

The waivers, issued to eight countries for an initial period of 180 days when Washington imposed sanctions against Iran’s oil and shipping sectors starting November 5 last year, were widely expected to be renewed.

Benchmark Brent and WTI crude prices, which have been hitting successive new five-month highs since the start of April on deliberate as well as unavoidable tightening of supply from the OPEC/non-OPEC combine, closed at six-month peaks of $74.04/barrel and $65.70/barrel respectively on Monday.

In the two-page briefing note enclosed, we examine the immediate and short-term implications of the latest development around these 5 key questions:

• How much higher can oil prices go?
• Are Iranian oil exports set to drop to zero?
• Could OPEC make up for the lost barrels?
• Will Iran blockade the Strait of Hormuz?
• What is the endgame?

In this briefing:

1. Weekly Oil Views: Brent Eyes $72 but Upside Looks Limited

1. Weekly Oil Views: Brent Eyes $72 but Upside Looks Limited

Brent closed at a fresh five-month peak of $71.97/barrel on Thursday, ahead of the Good Friday holiday. It had flirted with $72 during intraday trading earlier in the week, but failed to breach that psychological mark.

 For the most part, the upward momentum stemmed from optimism over the direction of the US and Chinese economies. But is there a positive-news bias among investors? Though US and China continue to inch closer to a trade deal and Beijing reported surprisingly strong Q1 GDP data this week, there are plenty of pockets of decelerating economic growth across the world.

 It will be a complex set of factors that OPEC and its non-OPEC allies will need to measure and weigh when they meet towards the end of June to decide on their production policy for the second half of the year. We expect the cuts to be rolled over, but with a pledge to not exceed the agreed overall amount of reduction.

Also in this report:

• OECD oil stocks fell in Feb – what are the implications? 
• Saudi-Russia differences on oil supply policy could grow
• Iran sanction waivers likely to continue
• US shale growth is clearly slowing. The question is, to what extent?

In this briefing:

1. Weekly Oil Views: Crude’s Fear Premium Looks Iffy but Supply Slumps Are Real
2. M&A LNG Theme Back in the Spotlight with Total’s Entry in Mozambique LNG
3. Bristow – Is There an Opportunity to Invest Prior to the Financial Restructuring?
4. Xinyi Energy (信义能源) IPO: An Overvalued Deal Disguised by High Dividend
5. Weekly Oil Views: US-China Deadlock In Tug-Of-War with Tight Supply

1. Weekly Oil Views: Crude’s Fear Premium Looks Iffy but Supply Slumps Are Real

Two main developments have been driving short-term sentiment in crude — US-China trade tensions and the Middle East geopolitical tensions — and oil market participants don’t have a clue on what to expect on either front.

There may be a $2-3/barrel fear premium in Brent on account of last week’s attacks on Saudi oil tankers and an oil pipeline, both allegedly the handiwork of Iran. However, US President Donald Trump was trying to defuse the tension by the end of last week, saying he is looking to negotiate not go to war with Iran. We expect the political temperature in the Middle East to cool down quickly, taking the fear premium with it.

On the US-China trade war front, continuing rhetoric and smoke signals instead of reports of concrete action will likely keep the world guessing. We expect the situation to keep a lid on oil prices while adding to the volatility.

The IEA, OPEC and the US EIA have all lowered their 2019 global oil demand growth forecasts in the past two months. However, it would be dangerous for the OPEC/non-OPEC ministers gathering in Vienna next month to roll over their pledged 1.2 million b/d of output cuts into the second half of the year. Even if Saudi Arabia and a couple of other countries exceeding their cuts pledge to ratchet up production in line with their quotas, they would fall well short of compensating the exports already being lost from Venezuela and Iran, flinging the market into severe supply tightness.

2. M&A LNG Theme Back in the Spotlight with Total’s Entry in Mozambique LNG

This insight has been produced in collaboration with Anish Kapadia as a joint effort of the Smartkarma Energy and Commodities Team.

With the acquisition of Anadarko Petroleum (APC US) ’s African assets from Occidental Petroleum (OXY US) for $8.8bn, Total Sa (FP FP) is adding a new LNG export position in East Africa to its growing global LNG portfolio. The acquired assets also include high-quality low cost producing fields offshore Ghana.

Total has been one of the most aggressive oil majors pursuing countercyclical upstream M&A during the oil downturn to expand its resource base at low cost. Is the French major paying a reasonable price for Anadarko’s assets?

The ongoing “re-gasification” of the oil majors’ portfolios is underpinning a growing interest among LNG buyers and portfolio players for quality LNG assets. Total’s entry in the prolific East Africa gas play is the latest example highlighting the LNG “theme” as one of the main strategic drivers of recent and likely future M&A activity in the oil and gas industry.

3. Bristow – Is There an Opportunity to Invest Prior to the Financial Restructuring?

We believe that Bristow’s senior secured bonds are overvalued at current levels of ~ 86% and would be better BUYERS in the low 60’s based on our valuation.

Accordingly, our analysis suggests that the value breaks in the senior secured part of the capital structure and we expect recoveries on the unsecured bonds to be close to zero.

4. Xinyi Energy (信义能源) IPO: An Overvalued Deal Disguised by High Dividend

Xinyi Energy, the subsidiary holding solar assets of Xinyi Solar Holdings (968 HK), started book building today. In our previous insights, we have discussed the company’s fundamentals, and the valuation based on future cash flow. In this insight, we will provide our final view on the deal.

Our previous coverage on Xinyi Energy

• Xinyi Energy (信义能源) IPO: AssetCo that Depends on Parent Injection
• Xinyi Energy (信义能源) IPO: High Dividend Yield but Depreciating Asset
• Xinyi Energy (信义能源) IPO: Value the Long Term Cashflow (Part 3)

5. Weekly Oil Views: US-China Deadlock In Tug-Of-War with Tight Supply

The breakdown of US-China trade negotiations has pressured crude prices lower in recent days, setting up a tug-of-war with tightening supply in the physical markets, which is already manifesting in steepening premiums for prompt barrels.

How and when the trade war ends is now anybody’s guess, but the blood-letting in the crude markets had stopped when trading resumed for a fresh week on Monday, although the region’s major stock markets were all in the red.

News on Monday that two Saudi oil tankers had been damaged in an attack off the coast of United Arab Emirates was in fact propping crude futures higher. The news lacked vital details, however, including who the attackers might have been, and may provide only a transitory boost to prices. 

Nonetheless, crude supply shortages and risks are continuing to pile up. The US has ratcheted up its military presence in the Middle East, and is cornering Iran from multiple directions, imposing sanctions against the latter’s metals exports in its latest manoeuvre last week. 

Iranian crude production slumped to its lowest in more than 30 years in April, and is set to plummet this month, with the end of the six-month sanction waivers that the US had granted to the Islamic Republic’s buyers last November. 

But as long as the shadow of the US-China trade tensions continues to hover over the financial markets, oil may remain reluctant to price in all the supply issues. That could lead to sudden spikes whenever an unexpected fresh outage or threat to oil supply storms to the centre-stage, heightening intraday and daily price volatility. 

In this briefing:

1. M&A LNG Theme Back in the Spotlight with Total’s Entry in Mozambique LNG
2. Bristow – Is There an Opportunity to Invest Prior to the Financial Restructuring?
3. Xinyi Energy (信义能源) IPO: An Overvalued Deal Disguised by High Dividend
4. Weekly Oil Views: US-China Deadlock In Tug-Of-War with Tight Supply
5. Chiyoda: The Upside Is in the Dilution Assumptions and Growing Backlog, and There Is a Lot of It

1. M&A LNG Theme Back in the Spotlight with Total’s Entry in Mozambique LNG

This insight has been produced in collaboration with Anish Kapadia as a joint effort of the Smartkarma Energy and Commodities Team.

With the acquisition of Anadarko Petroleum (APC US) ’s African assets from Occidental Petroleum (OXY US) for $8.8bn, Total Sa (FP FP) is adding a new LNG export position in East Africa to its growing global LNG portfolio. The acquired assets also include high-quality low cost producing fields offshore Ghana.

Total has been one of the most aggressive oil majors pursuing countercyclical upstream M&A during the oil downturn to expand its resource base at low cost. Is the French major paying a reasonable price for Anadarko’s assets?

The ongoing “re-gasification” of the oil majors’ portfolios is underpinning a growing interest among LNG buyers and portfolio players for quality LNG assets. Total’s entry in the prolific East Africa gas play is the latest example highlighting the LNG “theme” as one of the main strategic drivers of recent and likely future M&A activity in the oil and gas industry.

2. Bristow – Is There an Opportunity to Invest Prior to the Financial Restructuring?

We believe that Bristow’s senior secured bonds are overvalued at current levels of ~ 86% and would be better BUYERS in the low 60’s based on our valuation.

Accordingly, our analysis suggests that the value breaks in the senior secured part of the capital structure and we expect recoveries on the unsecured bonds to be close to zero.

3. Xinyi Energy (信义能源) IPO: An Overvalued Deal Disguised by High Dividend

Xinyi Energy, the subsidiary holding solar assets of Xinyi Solar Holdings (968 HK), started book building today. In our previous insights, we have discussed the company’s fundamentals, and the valuation based on future cash flow. In this insight, we will provide our final view on the deal.

Our previous coverage on Xinyi Energy

• Xinyi Energy (信义能源) IPO: AssetCo that Depends on Parent Injection
• Xinyi Energy (信义能源) IPO: High Dividend Yield but Depreciating Asset
• Xinyi Energy (信义能源) IPO: Value the Long Term Cashflow (Part 3)

4. Weekly Oil Views: US-China Deadlock In Tug-Of-War with Tight Supply

The breakdown of US-China trade negotiations has pressured crude prices lower in recent days, setting up a tug-of-war with tightening supply in the physical markets, which is already manifesting in steepening premiums for prompt barrels.

How and when the trade war ends is now anybody’s guess, but the blood-letting in the crude markets had stopped when trading resumed for a fresh week on Monday, although the region’s major stock markets were all in the red.

News on Monday that two Saudi oil tankers had been damaged in an attack off the coast of United Arab Emirates was in fact propping crude futures higher. The news lacked vital details, however, including who the attackers might have been, and may provide only a transitory boost to prices. 

Nonetheless, crude supply shortages and risks are continuing to pile up. The US has ratcheted up its military presence in the Middle East, and is cornering Iran from multiple directions, imposing sanctions against the latter’s metals exports in its latest manoeuvre last week. 

Iranian crude production slumped to its lowest in more than 30 years in April, and is set to plummet this month, with the end of the six-month sanction waivers that the US had granted to the Islamic Republic’s buyers last November. 

But as long as the shadow of the US-China trade tensions continues to hover over the financial markets, oil may remain reluctant to price in all the supply issues. That could lead to sudden spikes whenever an unexpected fresh outage or threat to oil supply storms to the centre-stage, heightening intraday and daily price volatility. 

5. Chiyoda: The Upside Is in the Dilution Assumptions and Growing Backlog, and There Is a Lot of It

Chiyoda Corp (6366 JP)‘s results briefing yesterday was relatively muted with few questions, perhaps due to limited details that the company could or would offer on improvements to its risk management process, and thus ended about 30 mins before schedule. We got the sense that while there was resolution of uncertainty regarding the balance sheet and going concern issues, investors may remain uncertain about the path to recovery and this combined with the overhang of massive potential dilution could keep the stock under pressure.

Our own view is notably more positive and we discuss this below.

In this briefing:

1. Competing Bids for Anadarko Finally Break the Calm in the Upstream Oil & Gas M&A Market
2. Oxy Pete Tops Chevron Offer for Anadarko – David Takes On Goliath
3. Special Briefing: Implications of US Ending Iran Oil Sanction Waivers
4. Weekly Oil Views: Brent Eyes $72 but Upside Looks Limited

1. Competing Bids for Anadarko Finally Break the Calm in the Upstream Oil & Gas M&A Market

The unfolding bidding war for Anadarko Petroleum (APC US)  is heating up a dormant upstream oil and gas M&A market that had been experiencing a record low level of activity in the last four months. The US large-cap E&Ps have been conspicuously absent from buy-side M&A during the oil price downturn. The high-profile potential acquisition of Anadarko, valued at more than $50bn and one of the top five largest M&A deals in the industry, could kick-off a new wave of consolidation among the leading independent US E&Ps. Chevron Corp (CVX US) chose an opportune time to acquire Anadarko as the US independent E&Ps are trading at the lowest differential EV/DACF multiple for the last ten years compared to the multiple traded by the oil majors. Chevron and Anadarko would be an ideal strategic fit, but can the US major improve its bid in light of the much higher competing offer from Occidental Petroleum (OXY US)?

Exhibit 1: Bid for Anadarko swells the M&A volume in upstream Oil & Gas after a meagre start of the year

2. Oxy Pete Tops Chevron Offer for Anadarko – David Takes On Goliath

Occidental Petroleum (OXY US) on Wednesday morning announced a proposal to acquire Anadarko Petroleum (APC US) , potentially upsetting the Chevron Corp (CVX US) definitive merger agreement to acquire Anadarko.

The proposal has a headline value of $76 per share, a nearly 20% premium to the implied $63.46 value of Chevron’s deal based on Chevron’s closing price of $122.02 on April 23rd. Oxy proposes a 50/50 cash/stock deal comprised of $38 cash plus .6094 OXY shares per APC share, or $38 billion in aggregate equity value.

 The details are laid out below.

3. Special Briefing: Implications of US Ending Iran Oil Sanction Waivers

President Donald Trump caught the oil market by surprise on Monday by declaring that the US will end all Iran sanction waivers after May 2.

The waivers, issued to eight countries for an initial period of 180 days when Washington imposed sanctions against Iran’s oil and shipping sectors starting November 5 last year, were widely expected to be renewed.

Benchmark Brent and WTI crude prices, which have been hitting successive new five-month highs since the start of April on deliberate as well as unavoidable tightening of supply from the OPEC/non-OPEC combine, closed at six-month peaks of $74.04/barrel and $65.70/barrel respectively on Monday.

In the two-page briefing note enclosed, we examine the immediate and short-term implications of the latest development around these 5 key questions:

• How much higher can oil prices go?
• Are Iranian oil exports set to drop to zero?
• Could OPEC make up for the lost barrels?
• Will Iran blockade the Strait of Hormuz?
• What is the endgame?

4. Weekly Oil Views: Brent Eyes $72 but Upside Looks Limited

Brent closed at a fresh five-month peak of $71.97/barrel on Thursday, ahead of the Good Friday holiday. It had flirted with $72 during intraday trading earlier in the week, but failed to breach that psychological mark.

 For the most part, the upward momentum stemmed from optimism over the direction of the US and Chinese economies. But is there a positive-news bias among investors? Though US and China continue to inch closer to a trade deal and Beijing reported surprisingly strong Q1 GDP data this week, there are plenty of pockets of decelerating economic growth across the world.

 It will be a complex set of factors that OPEC and its non-OPEC allies will need to measure and weigh when they meet towards the end of June to decide on their production policy for the second half of the year. We expect the cuts to be rolled over, but with a pledge to not exceed the agreed overall amount of reduction.

Also in this report:

• OECD oil stocks fell in Feb – what are the implications? 
• Saudi-Russia differences on oil supply policy could grow
• Iran sanction waivers likely to continue
• US shale growth is clearly slowing. The question is, to what extent?

In this briefing:

1. Bristow – Is There an Opportunity to Invest Prior to the Financial Restructuring?
2. Xinyi Energy (信义能源) IPO: An Overvalued Deal Disguised by High Dividend
3. Weekly Oil Views: US-China Deadlock In Tug-Of-War with Tight Supply
4. Chiyoda: The Upside Is in the Dilution Assumptions and Growing Backlog, and There Is a Lot of It
5. CSSC (HK) Shipping IPO: A Cyclical Business Masked as an Income Stock

1. Bristow – Is There an Opportunity to Invest Prior to the Financial Restructuring?

We believe that Bristow’s senior secured bonds are overvalued at current levels of ~ 86% and would be better BUYERS in the low 60’s based on our valuation.

Accordingly, our analysis suggests that the value breaks in the senior secured part of the capital structure and we expect recoveries on the unsecured bonds to be close to zero.

2. Xinyi Energy (信义能源) IPO: An Overvalued Deal Disguised by High Dividend

Xinyi Energy, the subsidiary holding solar assets of Xinyi Solar Holdings (968 HK), started book building today. In our previous insights, we have discussed the company’s fundamentals, and the valuation based on future cash flow. In this insight, we will provide our final view on the deal.

Our previous coverage on Xinyi Energy

• Xinyi Energy (信义能源) IPO: AssetCo that Depends on Parent Injection
• Xinyi Energy (信义能源) IPO: High Dividend Yield but Depreciating Asset
• Xinyi Energy (信义能源) IPO: Value the Long Term Cashflow (Part 3)

3. Weekly Oil Views: US-China Deadlock In Tug-Of-War with Tight Supply

The breakdown of US-China trade negotiations has pressured crude prices lower in recent days, setting up a tug-of-war with tightening supply in the physical markets, which is already manifesting in steepening premiums for prompt barrels.

How and when the trade war ends is now anybody’s guess, but the blood-letting in the crude markets had stopped when trading resumed for a fresh week on Monday, although the region’s major stock markets were all in the red.

News on Monday that two Saudi oil tankers had been damaged in an attack off the coast of United Arab Emirates was in fact propping crude futures higher. The news lacked vital details, however, including who the attackers might have been, and may provide only a transitory boost to prices. 

Nonetheless, crude supply shortages and risks are continuing to pile up. The US has ratcheted up its military presence in the Middle East, and is cornering Iran from multiple directions, imposing sanctions against the latter’s metals exports in its latest manoeuvre last week. 

Iranian crude production slumped to its lowest in more than 30 years in April, and is set to plummet this month, with the end of the six-month sanction waivers that the US had granted to the Islamic Republic’s buyers last November. 

But as long as the shadow of the US-China trade tensions continues to hover over the financial markets, oil may remain reluctant to price in all the supply issues. That could lead to sudden spikes whenever an unexpected fresh outage or threat to oil supply storms to the centre-stage, heightening intraday and daily price volatility. 

4. Chiyoda: The Upside Is in the Dilution Assumptions and Growing Backlog, and There Is a Lot of It

Chiyoda Corp (6366 JP)‘s results briefing yesterday was relatively muted with few questions, perhaps due to limited details that the company could or would offer on improvements to its risk management process, and thus ended about 30 mins before schedule. We got the sense that while there was resolution of uncertainty regarding the balance sheet and going concern issues, investors may remain uncertain about the path to recovery and this combined with the overhang of massive potential dilution could keep the stock under pressure.

Our own view is notably more positive and we discuss this below.

5. CSSC (HK) Shipping IPO: A Cyclical Business Masked as an Income Stock

CSSC (HK) Shipping, the ship leasing company under one of the world’s largest shipyard CSSC (China State Shipbuilding Corp), is said to be pre-marketing its USD 300 to 500 million IPO. In this insight, we will discuss the following topics:

• The company’s business segments
• The company’s assets
• The industry backdrop
• Financial snapshot and highlights
• Our thoughts on valuation

In this briefing:

1. Xinyi Energy (信义能源) IPO: An Overvalued Deal Disguised by High Dividend
2. Weekly Oil Views: US-China Deadlock In Tug-Of-War with Tight Supply
3. Chiyoda: The Upside Is in the Dilution Assumptions and Growing Backlog, and There Is a Lot of It
4. CSSC (HK) Shipping IPO: A Cyclical Business Masked as an Income Stock
5. Chiyoda: Explanatory Call on Downgrade Reinforces Impression of Extreme Conservatism

1. Xinyi Energy (信义能源) IPO: An Overvalued Deal Disguised by High Dividend

Xinyi Energy, the subsidiary holding solar assets of Xinyi Solar Holdings (968 HK), started book building today. In our previous insights, we have discussed the company’s fundamentals, and the valuation based on future cash flow. In this insight, we will provide our final view on the deal.

Our previous coverage on Xinyi Energy

• Xinyi Energy (信义能源) IPO: AssetCo that Depends on Parent Injection
• Xinyi Energy (信义能源) IPO: High Dividend Yield but Depreciating Asset
• Xinyi Energy (信义能源) IPO: Value the Long Term Cashflow (Part 3)

2. Weekly Oil Views: US-China Deadlock In Tug-Of-War with Tight Supply

The breakdown of US-China trade negotiations has pressured crude prices lower in recent days, setting up a tug-of-war with tightening supply in the physical markets, which is already manifesting in steepening premiums for prompt barrels.

How and when the trade war ends is now anybody’s guess, but the blood-letting in the crude markets had stopped when trading resumed for a fresh week on Monday, although the region’s major stock markets were all in the red.

News on Monday that two Saudi oil tankers had been damaged in an attack off the coast of United Arab Emirates was in fact propping crude futures higher. The news lacked vital details, however, including who the attackers might have been, and may provide only a transitory boost to prices. 

Nonetheless, crude supply shortages and risks are continuing to pile up. The US has ratcheted up its military presence in the Middle East, and is cornering Iran from multiple directions, imposing sanctions against the latter’s metals exports in its latest manoeuvre last week. 

Iranian crude production slumped to its lowest in more than 30 years in April, and is set to plummet this month, with the end of the six-month sanction waivers that the US had granted to the Islamic Republic’s buyers last November. 

But as long as the shadow of the US-China trade tensions continues to hover over the financial markets, oil may remain reluctant to price in all the supply issues. That could lead to sudden spikes whenever an unexpected fresh outage or threat to oil supply storms to the centre-stage, heightening intraday and daily price volatility. 

3. Chiyoda: The Upside Is in the Dilution Assumptions and Growing Backlog, and There Is a Lot of It

Chiyoda Corp (6366 JP)‘s results briefing yesterday was relatively muted with few questions, perhaps due to limited details that the company could or would offer on improvements to its risk management process, and thus ended about 30 mins before schedule. We got the sense that while there was resolution of uncertainty regarding the balance sheet and going concern issues, investors may remain uncertain about the path to recovery and this combined with the overhang of massive potential dilution could keep the stock under pressure.

Our own view is notably more positive and we discuss this below.

4. CSSC (HK) Shipping IPO: A Cyclical Business Masked as an Income Stock

CSSC (HK) Shipping, the ship leasing company under one of the world’s largest shipyard CSSC (China State Shipbuilding Corp), is said to be pre-marketing its USD 300 to 500 million IPO. In this insight, we will discuss the following topics:

• The company’s business segments
• The company’s assets
• The industry backdrop
• Financial snapshot and highlights
• Our thoughts on valuation

5. Chiyoda: Explanatory Call on Downgrade Reinforces Impression of Extreme Conservatism

Chiyoda Corp (6366 JP) conducted a conference call at 15:00 JST to provide further details regarding the large downgrade to FY guidance. The key points were:

• ¥80bn provision for extra costs at both Tangguh and Cameron
• ¥20bn change in expectations for several legal arbitrations
• ¥10bn in extra cost assumptions for numerous small domestic and foreign projects

What should be noted in particular is that the company has not aligned these changes in assumptions with its various partners for the projects involved. Chiyoda noted that it is being especially conservative in order to ensure that it does not repeat the cycle of downgrades it has suffered this year.

In this briefing:

1. Special Briefing: Implications of US Ending Iran Oil Sanction Waivers
2. Weekly Oil Views: Brent Eyes $72 but Upside Looks Limited
3. U.S. Equity Strategy: Upgrading Equal-Weight Energy Sector; Semis Are Leading Tech
4. Chevron Acquisition of Anadarko Petroleum – E&P Tempers Flare

1. Special Briefing: Implications of US Ending Iran Oil Sanction Waivers

President Donald Trump caught the oil market by surprise on Monday by declaring that the US will end all Iran sanction waivers after May 2.

The waivers, issued to eight countries for an initial period of 180 days when Washington imposed sanctions against Iran’s oil and shipping sectors starting November 5 last year, were widely expected to be renewed.

Benchmark Brent and WTI crude prices, which have been hitting successive new five-month highs since the start of April on deliberate as well as unavoidable tightening of supply from the OPEC/non-OPEC combine, closed at six-month peaks of $74.04/barrel and $65.70/barrel respectively on Monday.

In the two-page briefing note enclosed, we examine the immediate and short-term implications of the latest development around these 5 key questions:

• How much higher can oil prices go?
• Are Iranian oil exports set to drop to zero?
• Could OPEC make up for the lost barrels?
• Will Iran blockade the Strait of Hormuz?
• What is the endgame?

2. Weekly Oil Views: Brent Eyes $72 but Upside Looks Limited

Brent closed at a fresh five-month peak of $71.97/barrel on Thursday, ahead of the Good Friday holiday. It had flirted with $72 during intraday trading earlier in the week, but failed to breach that psychological mark.

 For the most part, the upward momentum stemmed from optimism over the direction of the US and Chinese economies. But is there a positive-news bias among investors? Though US and China continue to inch closer to a trade deal and Beijing reported surprisingly strong Q1 GDP data this week, there are plenty of pockets of decelerating economic growth across the world.

 It will be a complex set of factors that OPEC and its non-OPEC allies will need to measure and weigh when they meet towards the end of June to decide on their production policy for the second half of the year. We expect the cuts to be rolled over, but with a pledge to not exceed the agreed overall amount of reduction.

Also in this report:

• OECD oil stocks fell in Feb – what are the implications? 
• Saudi-Russia differences on oil supply policy could grow
• Iran sanction waivers likely to continue
• US shale growth is clearly slowing. The question is, to what extent?

3. U.S. Equity Strategy: Upgrading Equal-Weight Energy Sector; Semis Are Leading Tech

Of the ten items highlighted in last week’s Compass that we would like to see in order to turn more bullish, two have happened — equal-weighted Energy and UK/European Financials are breaking out. This only serves to add to our already positive outlook as U.S. equities are poised to test all-time highs. We are upgrading equal-weight Energy to market weight. Also in today’s report, we highlight attractive Groups and stocks within Technology: Large-, Mid-, and Small-Cap Semiconductors.

4. Chevron Acquisition of Anadarko Petroleum – E&P Tempers Flare

Chevron Corp (CVX US) and Anadarko Petroleum (APC US)  announced a definitive agreement on April 12, 2019 whereby CVX will acquire APC for $33 billion in a stock and cash deal with a headline value of $65 per share and an APC total enterprise valuation of $50 billion (including APC’s $2+ billion of minority interests on the balance sheet). This represents a nearly 39% premium to APC’s closing price on April 11^th of $46.80, and a 47% premium to APC’s 30 trading day average close through April 11^th.

Merger consideration consists of 0.3869 shares of CVX and $16.25 in cash. CVX will issue 200 million shares and pay $8 billion in cash, in addition to assuming APC’s $15 billion of net debt. The companies anticipate annual synergies of about $2 billion (“run-rate cost synergies of $1 billion before tax, plus capital spending reductions of $1 billion within a year of closing”) and expect the deal to be accretive to free cash flow and earnings one year after completion.

Below I dive into the details from the perspective of a merger arbitrageur evaluating the deal as a potential portfolio position.

In this briefing:

1. Weekly Oil Views: US-China Deadlock In Tug-Of-War with Tight Supply
2. Chiyoda: The Upside Is in the Dilution Assumptions and Growing Backlog, and There Is a Lot of It
3. CSSC (HK) Shipping IPO: A Cyclical Business Masked as an Income Stock
4. Chiyoda: Explanatory Call on Downgrade Reinforces Impression of Extreme Conservatism
5. PTT Set for Bull Breakout

1. Weekly Oil Views: US-China Deadlock In Tug-Of-War with Tight Supply

The breakdown of US-China trade negotiations has pressured crude prices lower in recent days, setting up a tug-of-war with tightening supply in the physical markets, which is already manifesting in steepening premiums for prompt barrels.

How and when the trade war ends is now anybody’s guess, but the blood-letting in the crude markets had stopped when trading resumed for a fresh week on Monday, although the region’s major stock markets were all in the red.

News on Monday that two Saudi oil tankers had been damaged in an attack off the coast of United Arab Emirates was in fact propping crude futures higher. The news lacked vital details, however, including who the attackers might have been, and may provide only a transitory boost to prices. 

Nonetheless, crude supply shortages and risks are continuing to pile up. The US has ratcheted up its military presence in the Middle East, and is cornering Iran from multiple directions, imposing sanctions against the latter’s metals exports in its latest manoeuvre last week. 

Iranian crude production slumped to its lowest in more than 30 years in April, and is set to plummet this month, with the end of the six-month sanction waivers that the US had granted to the Islamic Republic’s buyers last November. 

But as long as the shadow of the US-China trade tensions continues to hover over the financial markets, oil may remain reluctant to price in all the supply issues. That could lead to sudden spikes whenever an unexpected fresh outage or threat to oil supply storms to the centre-stage, heightening intraday and daily price volatility. 

2. Chiyoda: The Upside Is in the Dilution Assumptions and Growing Backlog, and There Is a Lot of It

Chiyoda Corp (6366 JP)‘s results briefing yesterday was relatively muted with few questions, perhaps due to limited details that the company could or would offer on improvements to its risk management process, and thus ended about 30 mins before schedule. We got the sense that while there was resolution of uncertainty regarding the balance sheet and going concern issues, investors may remain uncertain about the path to recovery and this combined with the overhang of massive potential dilution could keep the stock under pressure.

Our own view is notably more positive and we discuss this below.

3. CSSC (HK) Shipping IPO: A Cyclical Business Masked as an Income Stock

CSSC (HK) Shipping, the ship leasing company under one of the world’s largest shipyard CSSC (China State Shipbuilding Corp), is said to be pre-marketing its USD 300 to 500 million IPO. In this insight, we will discuss the following topics:

• The company’s business segments
• The company’s assets
• The industry backdrop
• Financial snapshot and highlights
• Our thoughts on valuation

4. Chiyoda: Explanatory Call on Downgrade Reinforces Impression of Extreme Conservatism

Chiyoda Corp (6366 JP) conducted a conference call at 15:00 JST to provide further details regarding the large downgrade to FY guidance. The key points were:

• ¥80bn provision for extra costs at both Tangguh and Cameron
• ¥20bn change in expectations for several legal arbitrations
• ¥10bn in extra cost assumptions for numerous small domestic and foreign projects

What should be noted in particular is that the company has not aligned these changes in assumptions with its various partners for the projects involved. Chiyoda noted that it is being especially conservative in order to ensure that it does not repeat the cycle of downgrades it has suffered this year.

5. PTT Set for Bull Breakout

PTT PCL (PTT TB) has formed a bullish congestive pattern after the impulsive rise back in late 2017 and sets the stage for a drive to new highs.

Pattern pivot levels will be used as action and risk points with a focus on an upside breakout of triangulation.

Macro triangle patterns as noted in the weekly cycle are frequently the most powerful formations that are followed by explosive breakouts.

During this correction from early 2018 volumes have deteriorated in line with a normalized corrective cycle. High sell volumes would be linked to a major cycle downturn which PTT is lacking.