Given the escalation of the Israel-Hamas war in Gaza, we do not rule out the possibility of an extension of conflicts to other countries in the Middle East. That said, we believe the operational risk to UEG's assets in Egypt is limited. While we trim our 2023E/24E earnings forecasts by 9.5%/2.0% after fine-tuning our oil & gas price assumptions to reflect the 3Q pricing, a prolonged Israel-Hamas war will lend support to the crude price in 4Q, in our view. Our Brent assumptions in 4Q23/2024E are US$95/87 per barrel. Our TP is revised down to HK$1.45 from HK$1.60 (based on an unchanged target P/E of 10x, a 30% discount to the historical average). Further increases in crude price will serve as a key catalyst.
Location of UEG's Egypt assets. While Egypt shares the same border with Gaza, UEG's oil and gas fields in Egypt are located >500km away from Gaza (Figure 1). Therefore, we think it's less likely for the Israel-Hamas war to affect the operation of UEG's oil & gas fields in Egypt. In 1H23, Egypt accounted for only 11% of UEG's total revenue. We expect the contribution from Egypt to further reduce over the coming years as Iraq will be the key growth driver.
Support to crude price in the near term. Brent crude price averaged at ~US$86/bbl in 3Q23 (-13% YoY; +7% compared with 1H23). Apart from the tension in the Middle East, we see several underlying factors to support the oil price: 1) The US Department of Energy stopped selling crude oil from Strategic Petroleum Reserve (SPR) in Jul and has started buying back crude oil since Aug to refill the SPR which is at the lowest level in >30 years; 2) Production cuts by OPEC+ serve as a reaction to any unfavorable change in oil demand.
UEG's output target unchanged. UEG has an oil & gas output growth target (-5.5% to +2.2% YoY) this year and we see a chance for UEG to be close to the high end of the range. We expect the volume growth to accelerate to 16%/18% in 2024E/25E, driven by Iraq's output growth.
Risk factors: 1) Decline in crude & gas price; 2) risk of impairment loss in Pakistan assets; 3) rising receivables; and 4) higher-than-expected capex.