Oil & Gas

OCBC on 7 Jul 2015

A Joint Comprehensive Plan of Action regarding Iran’s nuclear program could be reached as early as tonight, paving the way for the lifting of sanctions in Iran. However, important implementation details are still subject to negotiation, and the US Congress would also require time to review the deal. The immediate impact on the oil market is likely a release of stocks that Iran has, weighing on oil prices in the near term, though some degree of expectations for a successful nuclear deal has already been priced in the market. Amidst this, we search for oil and gas related companies that may stand to benefit from a lifting of sanctions in Iran, though we highlight that positive earnings contribution may not be immediate. On the global level, we find that Eni, Total and Royal Dutch Shell are companies that had very close ties with Iran in its history. We also look for SGX-listed companies that have established a foothold in the Middle East, the only remaining bloc that has reaffirmed its intention to maintain oil and gas production during this environment of lower oil prices. These companies may also be able to leverage on their working knowledge and relationships in the Middle East to capitalise on opportunities in Iran. We see that SBI Offshore, Vallianz Holdings, Atlantic Navigation and KTL Global are offshore & marine companies that have significant exposure to the region. What may happen A Joint Comprehensive Plan of Action regarding Iran’s nuclear program could be reached as early as tonight, reflecting the significant progress that has been made in discussions between the P5+1, the EU, and Iran. US and EU nuclear-related sanctions (which include oil-related sanctions) would be suspended after the International Atomic Energy Agency verifies that Iran has complied with key nuclear-related steps. However, important implementation details are still subject to negotiation, and the US Congress would also require time to review the deal.  What it means for oil prices The immediate impact on the oil market is likely a release of stocks that Iran has, which market watchers estimate to be about 40-45m barrels of oil stored on crude tankers. Hence oil prices may weigh in the near term, though some degree of expectations for a successful nuclear deal has already been priced in the market. In the medium term, the IEA believes that a 20-25% increase in the country’s oil exports to 3.5m bbl/day may be achieved months after which sanctions are lifted.  Searching for companies with the right exposure Amidst these developments, we search for oil and gas related companies that may stand to benefit from a lifting of sanctions in Iran, though we highlight that positive earnings contribution may not be immediate. We specifically look for companies whose contracts had ran into an impasse due to the imposition of sanctions.  On the global level, we find that Eni, Total and Royal Dutch Shell are companies that had very close ties with Iran in its history. Over the last three months, executives from these three companies held talks with Tehran to discuss about oil deals. We also look for SGX-listed companies that have established a foothold in the Middle East, the only remaining bloc that has reaffirmed its intention to maintain oil and gas production during this environment of lower oil prices. These companies may also be able to leverage on their working knowledge and relationships in the Middle East to capitalise on opportunities in Iran.  We see that SBI Offshore, Vallianz Holdings, Atlantic Navigation and KTL Global are offshore & marine companies that have significant exposure to the region.