PETALING JAYA: Oil and gas services and equipment (OGSE) companies in Malaysia are expected to benefit from the expected rise in capital expenditure (capex) within the industry in the year ahead.
This optimism is supported by strong oil prices, which are expected to stay around US$80 to US$90 per barrel in 2024, according to Hong Leong Investment Bank (HLIB) Research.
Specifically for benchmark Brent crude oil, the research house projects an average price tag of US$85 per barrel for 2024 and US$80 per barrel for 2025.
In its report, HLIB Research yesterday said it maintained an “overweight” rating on the oil and gas (O&G) sector, premised on the forecast of strong oil prices, which should drive global offshore capex.
“The ongoing global offshore capex drive as well as rising local upstream activities from Petroliam Nasional Bhd (PETRONAS) are expected to underpin the performance of OGSE providers, which are well-positioned to ride the ongoing upstream capex upcycle,” the brokerage said.
“Despite the recent pullback in oil prices to around US$75 per barrel, our view is that sector fundamentals and outlook remain intact, especially for OGSE players,” it added.
According to HLIB Research, the forecast of oil prices at US$80-US$90 per barrel in 2024 would be supported continued production cuts from the Organisation of Petroleum Exporting Countries (Opec) to pre-empt a potential lower demand arising from economic risk at least until mid-2024, heightened geopolitical uncertainties; limited supply capacity growth as US shale oil output growth starts to slow; and the restocking drive of the US Strategic Petroleum Reserve.
HLIB Research noted that although PETRONAS’ total capex of RM34.3bil for the first nine months of 2023 lagged the average committed amount of RM60bil a year, it expected the national oil and gas company to gradually increase its capex spending to sustain domestic production as it is expected to peak in 2024.
“Due to substantial maintenance backlogs that need to be performed, PETRONAS is expected to award all five packages for PETRONAS Asset Integrity Backlog Clearance by end-2023 or first quarter of 2024, amounting to RM4bil-RM5bil, where work will be carried out in 2024-2026,” the research house said.
“Furthermore, we also anticipate PETRONAS to dish out multi-year Pan-Malaysia maintenance construction and modification as well as hook-up and commissioning packages in mid-2024,” it said, adding these jobs would continue to benefit local OGSE players.
According to HLIB Research, global offshore capex drive would benefit floating production storage and offloading (FPSO) vessels and rig owners.
“The ongoing investment cycle in FPSO projects is set to bolster the order book of FPSO players. With an estimated 50 new FPSO awards by end-2030, one of the key re-rating catalysts for FPSO players would be securing some of these jobs,” HLIB Research said.
“The global drilling market is also currently enjoying an upward cycle due to a drilling-rigs crunch as the Middle East has been soaking up the jack-up rigs from other regions as its jack-up rigs demand rose more than 20% in 2023, leading to robust utilisation rate and daily charter rates,” it added.
Citing international research company Evercore ISI, HLIB Research pointed out that the demand for jack-up rigs in South-East Asia is expected to increase to 38.4 units in 2024 and reach 39.2 units in 2025.
Drilling-rig count in the region stood at only 37 units as of November 2023, implying a deficit moving into 2024, it added.
HLIB Research said among its top picks for the oil and gas sector is Bumi Armada Bhd
due to the favourable outlook for FPSO players and the stock’s undemanding valuation.
It also favoures Wasco Bhd for its niche expertise of being one of the only few pipe coaters in the world, which would put the company in a good position to capitalise on the rising demand for pipe-coating services spurred by ongoing O&G upstream capex upcycle.
HLIB Research also named Velesto Energy Bhd as one of its top picks in view of the company’s expected strong earnings growth in the coming quarters on robust utilisation and charter rates for its jack-up rigs.
