PETALING JAYA: The prospects for the domestic oil and gas industry look bright this year, given the expected increase in upstream capital expenditure (capex), leading to continued activity and higher prices.
“From perusing Petroliam Nasional Bhd’s (PETRONAS) first quarter (1Q24) report card, we expect its capex to be maintained at RM50bil to RM60bil in 2024, with the upstream segment being the key focus in order to achieve its production target,” RHB Research said.
The research house, which has an “overweight” call on the sector, remained positive on the upstream-service players, premised on sustained activity, elevated service rates and news flows about contract renewals.
“Despite typically being a seasonally weak quarter, we saw five companies under our coverage – Dialog Group Bhd , Bumi Armada Bhd , Dayang Enterprise Holdings Bhd , Coastal Contracts Bhd and MISC Bhd – booking results that surprised on the upside,” RHB Research added.
The research house said it expects activity for upstream-service providers to ramp up in the second and third quarters with crude oil prices hovering at US$88 to US$85 per barrel.
“Drilling activity should remain solid, similar to maintenance. Meanwhile, the outlook for the offshore support vessel (OSV) market is rosy, as there is still potential for improvement in daily charter rates due to tight vessel supply.
“We expect domestic long-term maintenance and OSV-charter contracts to be awarded in the second half of 2024, providing further earnings visibility in the medium term,” RHB Research added.
PETRONAS posted a lower net profit of RM21.3bil compared with RM23.8bil a year ago due to higher operating costs, weaker joint venture and associate contributions, as well as lower realised prices.
It paid a RM3bil dividend to the government in 1Q24, putting it on track for its full-year payment of RM32bil.
According to the research house, PETRONAS’ net cash position improved 2% quarter-on-quarter to RM110bil as of 1Q24 as its strong operating cash flow was offset by capex and dividend payments. Capex stayed at RM10.7bil in 1Q24.
Similarly, Kenanga Research kept its “overweight” rating on the sector.
“We continue to be positive on upstream-service providers due to the expected increase in upstream capex in 2024, which coincides with the tight availability of contractors and OSV vessels.
“However, we are less optimistic about the downstream-sector outlook amid uncertainty in global demand and an anticipated increase in global capacities,” the research house added.
One of Kenanga Research’s top picks is Dialog Group Bhd as its legacy engineering, procurement, construction and commissioning (EPCC) contracts with less favourable pricing concluded in 1Q24, and recovery in its tank terminal business.
Yinson Holdings Bhd is another of Kenanga Research’s top picks due to its strong floating production, storage and offloading (FPSO) order book and early exposure to green-technology businesses.
Meanwhile, Hong Leong Investment Bank Research (HLIB Research) stayed “overweight” on the sector, premised on elevated oil prices that are expected to be supported by continued production cuts from the Organization of the Petroleum Exporting Countries and its allies (Opec+), heightened geopolitical tensions, as well as slowing oil-production growth.
“With oil prices hovering above US$80 per barrel, we believe it bodes well for local oil and gas services and equipment players in view of buoyant upstream activity around the globe, coupled with PETRONAS’ capex drive to sustain local production,” it added.
The research house’s top picks include Bumi Armada Bhd, mainly due to its undemanding valuation in anticipation of bumper earnings in financial year 2024 as contributions from Armada Sterling V FPSO set in.
HLIB Research also likes Hibiscus Petroleum Bhd , given its strong foothold in upstream oil and gas production, enabling the stock to fully benefit from higher oil prices.
