Asia Pacific Energy Oil:Alpha in a flatter oil price outlook;Buy PetroChina (H),Woodside

Brent oil price forecasts: 2017 up to $57/bbl, 2018 down to $58/bblFollowing the recent production cuts announced by OPEC/non-OPEC, theGS Commodities Research team raised its 2017 Brent oil price forecast by6% to $57/bbl but lowered its 2018 forecast by 8% to $58/bbl. Our view of aflatter oil price outlook captures the dynamic supplies in the New Oil Order.

For 2017, initially we expect the lackluster 4Q16 oil fundamentals due tohigher supplies (e.g., OPEC and Russia) to lead to limited near-term priceupside. Then, we see a stronger global oil market in 2H17, as productioncuts and strong demand growth forecasts likely result in normalization ininventories and backwardation across the forward curve by next summer.

For 2018, we expect the global market to remain balanced at $58/bbl(Brent) once the upcoming cuts normalize inventory, based on: (1) higherproduction from low-cost producers; (2) a greater US shale supplyresponse; and (3) the continued ramp-up in legacy projects.

Upstream/integrated stocks: Buy PetroChina and WoodsideWe continue to focus on free cash flow (FCF), dividend yield andstrategic appeal. Within our Asia Pacific coverage, the implied Brent oilprices based on current share prices range from US$48-74/bbl, with theaverage 2017E FCF yield at 5% and dividend yield at 2%.

China: Four catalysts to re-rate PetroChina (H)We continue to prefer PetroChina (H) (Buy) to CNOOC (Neutral) under aflatter and range-bound oil outlook, especially as CNOOC has been trackingthe recent oil price recovery much more closely. We are Rating Suspendedon Sinopec. We expect PetroChina to see further re-rating from recentEV/DACF trough levels, due to: (1) gas price hikes; (2) operating leveragefor its upstream business from any near-term lift to oil prices; (3) dividendupside potential (e.g., unprecedented 1H16 special dividend, low gearingand robust FCF yield); and (4) potential valuation upside from its continuedpipeline assets restructuring. We forecast that 2017 domestic oil outputdeclines 4.5% for PetroChina and 4.0% for CNOOC, while their explorationand production (E&P) capex rebounds.

Australia: Buy Woodside, Sell BeachWoodside remains our preference in Australian E&P, for its FCF growth(Wheatstone) and strong dividend. We reiterate our Sell rating on BeachEnergy, which is a valuation call (current share price implies US$74/bbl).

India/ASEAN: Neutral, fair valuationsWe stay Neutral on ASEAN/India upstream names, mostly on valuation.