>Offshore rig sector (FIRST GLOBAL)

The Story…

The offshore rig sector has recently been witnessing a sea of change. With very little activity from the time when crude oil prices spiked and tanked in the early 80s, the offshore drilling and exploration space has remained quiet over the years. While the first Gulf War did create some interest in the sector, it proved to be short lived. Throughout the 90s until almost 2006, nothing significant really happened in this space. However, from around 2006 onwards, the massive rise in crude oil prices suddenly made the offshore rig space one of the hottest sectors, led by strong demand, all time high day rates, and significant investments made by the players themselves for procuring new rigs (leading to increase in orders for ship builders), as well as by investors looking to make their fortunes. Stocks belonging to rig providers became the favourites in the market and rig service companies earned handsome returns with their high operating margins. Then came the oil price crash – one that we had predicted:

Quote
“It is our case. Nay, stand: Crude Oil will tank (short term bear market rallies notwithstanding) to below $90 by this year-end, and by our reckoning, should hit $50 in the next 12 months’ time.”

Until a few months ago, when it was widely believed that the oil prices would go nowhere but up, the entire upstream space had become red-hot. However, all that has now changed due to the recent steep fall in oil prices, which has resulted in a sudden change in investor sentiments towards the sector. To make matters worse, the fall in oil prices has been accompanied by a crash in the global financial markets due to the credit crisis. The combination of these factors has driven down the stocks of rig service providers.

To see full report: Offshore Rig Sector

>Flash Markets (ECONOMIC RESEARCH)

Could oil prices increase due to speculation?

Current trends in the spot oil market are not expected to be able to trigger a sharp increase in prices, even though the production cuts are pronounced, since there continues to be substantial excess capacity. The recent increase in the oil price is also linked to the appearance of several encouraging economic signs (recovery in China, etc.) and is therefore perhaps a leading signal of a stronger increase linked to speculation in addition to the rebalancing of the spot oil market seen at the end of the first quarter of 2009. It is thus important currently to determine whether the sharp increase in the oil price in 2007 and early 2008 were accounted for by speculation or not. If the answer is yes, we can again now fear an increase in the oil price that is not only due to the physical characteristics of the oil market.

We shall show, through the analysis of causalities and an econometric analysis that the futures market plays a major role in the formation of the spot oil price. The number of open long futures positions is the variable that most fully explains fluctuations in the price, which also depends on the imbalance of the spot market. This would seem to confirm the major role played by speculative positions in the formation of the spot oil price.

To see full report: FLASH MARKETS

>>Indian Banking Sector (MACQUARIE RESEARCH)

Bond yields, NPLs in focus

EVENT
We preview the 4Q FY3/09E results for Indian banks.

IMPACT
Decelerating NII: Net interest incomes will decelerate this quarter as a result of slowing loan growth and lower margins, in our view. Systemic loan growth has slowed from the October peak primarily because of disinflation; company revenues (and thus, working capital needs) have shrunk. Cancelled capital projects have emphasised the slowdown. NIMs have also been under pressure, due to aggressive benchmark rate cuts from the banks – the benefits from lower deposit rates will take a couple of quarters to offset this.

Bond profits will disappear: Bond profits are expected to reverse this quarter, as bonds collapsed over this quarter. Bond yields are up by almost 200bp over the quarter, reversing a 300bp fall in the previous quarter. Almost all banks benefited strongly from bond profits in 3Q FY3/09E, and that trend
should significantly reverse over this quarter.

NPLs pushed into FY3/10E: Despite the dramatic slowdown in the economy from October/November, we think it is too early for NPLs to show up in most P&L accounts. The worst period for NPLs is likely to be FY3/10E and FY3/11E, with probably an even spread of provisions. One of the key reasons
for the postponement is the window that the RBI has allowed banks to restructure assets: It allows banks to absorb the losses over a long period.

Revising forecasts: We are revising our forecasts for some of the banks under our coverage, partly due to the strong loan growth and margins that came up in 3Q FY3/09, and our view that the provisions will be postponed to later years.

OUTLOOK
We remain cautiously optimistic on Indian banks, and believe that:
* The valuations, in many cases, factor in an asset quality slippage situation that is too pessimistic.

*The deep interest rate cuts actioned by the RBI since October 2008 will
have a medium-term beneficial impact on the banks.

* We upgrade Bank of Baroda to Outperform from Underperform, given the belief that its core profitability is improving while NPLs will be cushioned by its high provision coverage. Our top picks in the sector remain HDFC (HDFC IN, Rs1,577, OP, TP: Rs1,738) and HDFC Bank (HDFCB IN, Rs1,037, OP, TP: Rs1,106).

To see full report: BANKING SECTOR

>What’s Happening? (ANAGRAM)]

AGENDA

• What’s Happening in the Markets.
• What’s Happening in the World
• What has improved?
• What’s Next ?
• What’s the outlook ?

To see full report:WHAT’S HAPPENING