In this briefing:
- WTI Turn Inflection for Demand Downturn
- Revisiting Mitr Phol Group: Erawan and Banpu
- RockRose-Viaro Deal: Trading Close to Terms
- Soechi Lines – Tear Sheet – Lucror Analytics
- Weekly Oil Views: Crude Hits 4-Month Highs, May Get a Reality Check from Demand
Crude Oil (CRUDE OIL COMDTY) rise off the April low with June new highs are are not being confirmed by the RSI for a case of bear divergence as the overlapping price has formed a rising wedge. Wedge patterns have a 70% probability of breaking lower with odds increasing on the back of divergence.
Divergence forms when momentum, buy volume and conviction deteriorate.
As virus cases climb, questions linked to demand will resurface.
42 resistance is a pivotal level; a rejection would set in motion a pullback to test and break the 38 near support and lower wedge level that will open up the downside.
We visited three companies in the Mitr Phol Group, namely hotel chain Erawan, the and Thailand’s largest coal producer Banpu. This is a quick run-down.
- Erawan reported net loss of Bt77m in Q1’20 and EBITDA contraction of 63% to Bt224m. The company closed its Thai hotels since April and Manila-based ones since May 19.
- Cost cutting: The company plans to cut lease payments by 20-30% and also postpone debt repayments to the banks. They also plan to cut investments by 50%.
- Banpu Power reported healthy EBITDA of Bt1.77bn (up 10% YoY) on the back of Bt1.84bn (+5% YoY) buoyed by stronger demand for power and steam in China needed to operate hospitals. However, its one-time core power plant BLCP contributed a loss of Bt70m due to translation losses. The hidden crown jewel is Banpu NEXT, the renewable business, which just needs time to appreciated.
- The parent company Banpu reported an EBITDA of US$134m, down 42% YoY, and earnings of Bt55m. The coal business, just like other energy segments (oil, gas), performed poorly, but Banpu made the most of it by negotiating down the price of Barnett in the United States, a deal that will be concluded towards the end of this year.
On 6th July, UK-based independent Oil & Gas company Rockrose Energy PLC (RRE LN) made an announcement that it had agreed to be acquired by physical energy trading group Viaro Energy in a Deal that values the company at a market cap of of GBP244mn.
The Transaction will be implemented by way of a Scheme of Arrangement. The Offer Price is GBP18.50/share and the consideration will be in the form of cash.
The Deal is conditional on receiving approval from RockRose Energy shareholders and is expected to complete in August 2020.
In this insight, we look into the details of the transaction to evaluate the likelihood of this Deal completing.
As usual, there is more below the fold.
We view Soechi Lines as “Very High Risk” on the LARA scale. This reflects the risks associated with:  its shipyard business, with reported delays in deliveries, low visibility of new contracts and weak cash flow; and  high capex for acquiring new vessels. Soechi’s FCF generation is poor. Moreover, there are event risks associated with vessel accidents and a breakdown in its relationship with Pertamina.
Positively, Soechi is the largest independent vessel owner/operator in Indonesia, behind the SOE Pertamina (rated Baa2/BBB). Pertamina is Soechi’s largest customer and accounts for c. 70% of its revenues. This customer concentration risk is somewhat mitigated by their four-decade-long symbiotic relationship. The shipping business is mainly conducted through long-term time charters, which provides some stability and visibility in terms of cash flow.
Our Credit Bias on Soechi is “Negative”, owing to its weaker than expected operating performance and high leverage. We expect FCF generation to be minimal. Moreover, we deem management to have a poor track record of communication.
We view Soechi’s corporate governance as “Weak” on the LAGA scale, mainly due to the:  family control (83% ownership) and family members (four brothers and two sisters) running the company;  ongoing related-party transactions; and  poor track record of investor communication and guidance.
Crude’s ascent to four-month highs appears to have disregarded the chances of US oil demand recovery easing or even stalling as the coronavirus tightens its grip over large swathes of the country.
The pandemic has been accelerating in at least 37 of the 50 US states, prompting many to roll back or put on hold some of their reopening measures.
It is still a “light touch” approach by most state governors and far removed from the “lockdowns” imposed earlier by the hard-hit countries in Europe and Asia. But that could result in the situation in the US festering for much longer.
Meanwhile, the pace of demand recovery in China and India, the second- and third-largest oil consumers after the US, is also poised to ease.
A combination of slowing global oil demand recovery and OPEC+ readying to put more than 2 million b/d back in the market starting next month could stall supply-demand rebalancing.
That would strain an already fragile OPEC/non-OPEC alliance. What if it breaks down again? We look at this and some other WILD CARDS in the oil market.
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