Bright prospect for energy stocks

PETALING JAYA: Petroliam Nasional Bhd’s (PETRONAS) new outlook report for the next three years has provided some excitement to domestic energy stocks.

Often regarded as the medium-term guidance for the oil and gas (O&G) sector, the PETRONAS Activity Outlook (PAO) 2024-2026 report projected an increase in upstream activities.

This will be led by a rise in drilling and offshore support vessel (OSV) operations.

The improved prospects lifted the Energy Index of Bursa Malaysia marginally by 0.04% yesterday, despite the dull investor mood on the stock exchange.

For comparison, the FBM KLCI fell by 0.61% to 1,455.58 points.

Across Bursa Malaysia, a total of 435 decliners trumped 390 stocks that saw an increase in their share price.

It is noteworthy that a number of upstream O&G-related stocks performed favourably yesterday, following the release of PAO 2024-2026 on Dec 20.

The share prices of Velesto Energy Bhd and Ocean Vantage Holdings Bhd rose by 2.22% each.

Meanwhile, Dialog Group Bhd, Dayang Enterprise Holdings Bhd and Hibiscus Petroleum Bhd saw an increase of 0.49%, 0.61% and 0.79%, respectively.

Practice Note 17 companies Barakah Offshore Petroleum Bhd and Sapura Energy Bhd rose by 14.29% and 11.11%, respectively.

PETRONAS had previously suspended its licence to Barakah’s unit PBJV Sdn Bhd for three years due to non-performance. The suspension was, however, lifted in April 2023.

In June, PBJV managed to secure a PETRONAS licence again for the next three years.

Following the release of the PAO 2024-2026 report, Maybank Investment Bank (Maybank IB) Research and RHB Research have maintained their bullish view on the O&G sector.

Kenanga Research, on the other hand, has retained its “neutral” outlook on the overall O&G landscape.

However, it said PETRONAS’ new report has reinforced its positive outlook on the upstream service segment for 2024.

In a note, Maybank IB Research said PETRONAS’ new report pointed to a “more confident” outlook, especially for four sub-segments.

These are floating production, storage and offloading (FPSO) and mobile offshore production unit (Mopu); hook-up commissioning (HUC) and maintenance, construction and modification (MCM), OSVs and underwater services.

“For companies under our coverage, Yinson Holdings Bhd, MISC Bhd, Bumi Armada Bhd, Icon Offshore Bhd and Dialog (for which we have “buy” calls on) are key potential beneficiaries of the ramp-up in activities in these sub-segments,” it said.

The research house also noted that PETRONAS has been subtly hinting at a sizeable capital expenditure (capex) in 2024.

Based on its yearly observations, Maybank IB Research said PETRONAS has to decide on how it will strike a balance between three major decisions, namely, capex spending, dividend commitment and balance sheet preservation.

“As at end-September 2023, PETRONAS sat on a net cash position of RM96.7bil.

“Given a lower dividend commitment of RM32bil for 2024 (from RM40bil in 2023) despite a higher average Brent crude oil price expectation of US$85 per barrel, we see the possibility of PETRONAS’ capex being sizeable, with most sub-segments seeing increased investment in 2024, in our view,” it added.

Meanwhile, RHB Research pointed out that the latest PAO indicated some upward revision in sub-segment activities for 2024-2025.

Overall, it said most sub-segments had not met their planned targets in 2023, except for underwater services, well decommissioning, heavy lift structural installations and fixed structure fabrications.

Some of these upward adjustments reflected an overflow of uncompleted jobs this year to 2024.

“PETRONAS targets to sustain and grow Malaysia’s O&G production to two million barrels of oil equivalent per day by 2025 and beyond.

“This will be supported by key projects such as Kasawari, Jerun, Rosmari-Marjoram and Lang Lebah, Gumusut-Kakap Redev and Belud Clusters, among others.

“In the coming years, over 45 upstream projects are to be executed and more than 25 wells are expected to be drilled, focusing on shallow water wells in Peninsular Malaysia and Sarawak, and deepwater wells in Sabah,” it said.

Looking ahead, RHB Research continued to like OSV, well decommissioning and maintenance-related players, calling them “bright spots” within the O&G sector.

Maintenance-related players are likely to benefit from higher HUC and MCM projections in 2024.

Facilities improvement plans such as rejuvenation projects, gas generator change-out activities and other major maintenance activities could benefit a broader list of listed maintenance players.

Additionally, in view of the supply shortage, RHB Research said higher total OSV demand in 2024 is likely to result in better vessel utilisation and anchor daily charter rates, benefiting OSV players.

The research house also maintained the oil price forecast for 2024 to 2026 at US$85, US$80 and US$80 per barrel, respectively.

In a separate note, Kenanga Research stated that the PAO 2024-2026 report aligned with its expectations. The report indicated an upswing in activities for upstream service providers in 2024, except for engineering, procurement, construction and commissioning (EPCC) players.

“We continue to advocate focus on the upstream services sub-segment within the local O&G sector, especially in brownfield projects, to capitalise on the sustained increase in PETRONAS’ upstream capex.

“The downstream segment does not appear promising in the short to medium term due to global demand concerns.

“Additionally, we favour the mid-stream segment, particularly tank terminals, as the market indicates signs of bottoming out, and the surge in projects related to low-carbon storage offers growth opportunities for tank terminal operators,” it said.

In 2024, production supporting OSVs for brownfield operations are projected to require a total of 148 vessels, reflecting a modest 3% year-on-year (y-o-y) increase.

The rise in demand is primarily attributed to platform supply vessels as well as work boats and barges.

Notably, there is a significantly higher anticipated demand surge of 29% y-o-y for drilling-supporting vessels in 2024.