OPEC+ reach a deal; our view does not deem it enough

▪The Organization of Petroleum Exporting Countries (OPEC) and non-OPEC countries,
such as Russia, reached a deal on Sunday, with participants agreeing on cutting overall
production by 9.7 MN BPDs (amounting to ~10% of global supply) up till Jun’20. This
effectively brought the price war between Russia and Saudi Arabia to a halt.


Timeline of the talks: The latest version of the talks was initiated on Thursday—when
a 10 MN BPD cut was announced—and were brought to an impasse when Mexico
refused to follow suit and cut production. However, on Sunday, a revised deal was agreed upon, outlining a slightly lower production cut from the group. Under the revised agreement, Mexico will be cutting ~100k BPD of its production, rather than the 400k BPD that it was asked to slash on Thursday.

US intervention: On Friday, President Donald Trump, in a White House Press Briefing,
said that the United States would be cutting its production rate in order to make up
for the lower cut by Mexico. However, the quantum of the cuts and the mechanism of
implementation are still unclear. The US has been brokering a deal between Saudi Arabia and Russia, since earlier talks held in the early part of March broke down—using threats of possible tariffs against foreign fuel sources.

Price action following the cut: Prices gained as much as 9% in early morning trading
today following the cuts; however, since then prices have dropped. As of 5:00 PM
Pakistan State Time, Brent is down 0.44%, while WTI is up by a mere 0.09%.

Is it enough? Initially, global crude oil demand was expected to drop by ~20 MN BPD
by Vitol—the world’s largest oil trader. However, Trafigura—the second largest oil
trader— has estimated the COVID-19 pandemic to curb global demand by ~30 MN
BPDs. The 9.75 MN BPDs cut from OPEC+, along with expectations of G20 countries to cut another 5 MN BPDs, while expected to narrow the gap between supply and demand,
is not enough to alleviate the issue. Hence, we view a supply glut to remain in the market, keeping the prices under pressure in the short-term.

A risk continues to loom: All the aforementioned is predicated by the assumption that
all countries in the accord will stick to the agreement. In the recent past, Russia and
Saudi Arabia have steered away from an accord, which has brought the accord to its
knees. A similar strategy from the countries during the ongoing pandemic holds the
potential of bringing crude oil prices to their knees.

Long-term Outlook: While the future of the commodity remains bleak in the shortterm, we expect prices to recover in the long-term; predicated by:

Supply-side factors: Lower crude oil prices are expected to lower financial viability
of oil producing operations around the world, which can already be seen in the
United States—as illustrated in Exhibit A in the Appendix.

Demand-side factors: As the global COVID-19 curve flattens, industries and travel
around the world are expected to reopen. This would once again bring demand for
petroleum products—derived from crude oil.

Recommendation:
We reiterate our USD 50/BBL long-term crude oil assumption. We continue to like the
Oil & Gas Exploration sector, especially with the current valuations. The sector is
currently trading at 4.02 times its LTM earnings, 43% lower than its 2-year average of
7.00x.
Our top picks from the sector are OGDC (TP: PKR 181/sh; upside 94%) and PPL (TP:
PKR 166/sh; upside: 98%)—illustrated in Exhibit C.

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