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Morgan Stanley Sees Oil At $80, Upgrades COSL

What can $80 oil buy?

About all the Chinese oil companies.

“While we believe the oil price might not recover to US$80/bbl anytime soon, the supply-demand rebalance does lay out a solid foundation for crude oil prices to recover in the following 12-18 months,” wrote Morgan Stanley analyst Andy Meng. The bank’s commodity team has raised its long-term oil forecast from $60 to $80 a barrel.

So at $80 a barrel, all three Chinese oil majors, CNOOC (883.Hong Kong/CEO), Sinopec (386.Hong Kong/SNP) and PetroChina (857.Hong Kong/PTR), become attractive. But the most attractive stock is China Oilfield Services, or COSL (2883.Hong Kong), which counts CNOOC’s as its largest customer. Even though both are big oil-beta plays, COSL has slumped 12% this year, while CNOOC gained 15%. This is because CNOOC has said it would cut down its capital expenditure, which hurts COSL’s businesses.

Going forward, Morgan Stanley sees COSL to play catch-up, because at $80 a barrel, CNOOC will start infrastructure spending again:

CNOOC outperformed COSL by 16ppt in 2014, 28ppt in 2015 and 30ppt in 2016 YTD. However, under an US$80/bbl scenario, we think COSL can outperform CNOOC given: 1) CNOOC’s FCF can be increased by >Rmb60bn; 2) CNOOC will raise capex by ~100% from that in 2015 assuming that the company pursues a cash flow neutral strategy; and 3) COSL will benefit from the strong capex increase, which will be at the cost of CNOOC’s cash flow.

Morgan Stanley has HK$9.57 price target for COSL, implying another 63% upside. Today’s upgrade is not coming at a good time however. Energy companies slumped after oil tumbled 4.9% overnight. CNOOC was down 2.8%, PetroChina fell 2.7%, Sinopec tumbled 3.6%.
Source: Barron’s Asia

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