Kenanga Investment Bank (Kenanga) highlighted robust prospects for Malaysia’s Oil & Gas sector in its latest report. The bank maintained an OVERWEIGHT rating, citing sustained opportunities in mid-stream and upstream segments.
They affirmed Brent crude price forecasts at USD84/bbl and USD79/bbl for CY24 and CY25 respectively, anticipating an end to OPEC+ production cuts by late CY24 and subsequent production ramp-ups in CY25. These price levels support local upstream investments, particularly benefiting owners of offshore supply vessels (OSV) and jack-up rigs amid supply constraints and contango market conditions. Kenanga’s top picks include DIALOG (OP; TP: RM3.18), PETDAG (OP; TP: RM23.70), and VELESTO (OP; TP: RM0.34).
Upstream activities were poised for growth as Brent crude prices hovered around USD84/bbl year-to-date, with expectations of seasonal fluctuations and OPEC+ gradually easing production cuts by late CY24. This outlook favoured Malaysian upstream service providers, bolstered by Petronas’ increased domestic capex allocation, particularly in cleaner energy and decarbonization projects. The sector witnessed a surge in demand, notably for OSVs and jack-up rigs, driven by brownfield maintenance rather than new projects, hinting at a potential upside in charter rates.
The OSV market, despite achieving record daily charter rates for some vessel types, faced limited supply growth in 2024. Domestic and global orders for new OSVs remained subdued, with minimal expansions forecasted even into CY25. This supply-demand gap indicated sustained opportunities for service providers amidst rising activities from Petronas and other oil majors, particularly in topside maintenance and hook-up services, supporting robust demand for vessels like accommodation work boats (AWB).
Midstream segments, particularly tank terminals, benefitted from a switch to contango in the oil futures curve and heightened geopolitical tensions, driving demand for storage capacities. Jurong Port’s recent expansions highlighted tight supply conditions in the Straits region, with terminals operating at full capacity. DIALOG stood to gain from these dynamics, anticipating enhanced earnings from its tank terminals, given strong spot rates and expanding downstream projects in Pengerang, Johor.
Downstream, recovery signals were tentative amidst a sluggish global economic backdrop, especially in China’s petrochemical sector. Price pressures persisted, although urea prices stabilised near historic averages, supported by lower natural gas costs. Kenanga advised focusing on upstream and midstream segments for potential investment, considering ongoing sector dynamics and firm-specific growth prospects.
Kenanga reiterated its positive outlook for the Oil & Gas sector, anchored by favourable market conditions and strategic investments in upstream and midstream assets. They maintained their BUY ratings on DIALOG, PETDAG, and VELESTO, with target prices indicating substantial upside potential based on sector-specific growth drivers and market valuations. Investors keen on exposure to Malaysia’s Oil & Gas sector may find these stocks attractive amidst promising sector fundamentals and supportive macroeconomic factors.
