UOBKH Research the O&G’s sector trading outperformance was propelled by recent results season and a promising capital expenditure outlook.
PETALING JAYA: Despite having an “overweight” call on the oil and gas (O&G) sector, UOB Kay Hian (UOBKH) Research suggests cautious trading as the sector valuations may not have fully taken into account the execution and operational expenditure (opex) risks.
In a report, the research house said the O&G’s sector trading outperformance was propelled by recent results season and a promising capital expenditure (capex) outlook.
“We retain the sector ‘overweight’ until Petroliam Nasional Bhd (PETRONAS) releases its 2023 results, but suggest being more cautious as the sector valuations may not have adequately priced in execution and opex risk,” it said.
UOBKH Research suggests a narrower trading range for stocks that have unique themes within their sub industries.
Notably, it said Dialog Group Bhd
is well positioned as a recovery play on profit and new contract angle.
Meanwhile, the research house highlighted that PETRONAS’ Offshore Technology Conference (OTC) Asia 2024 was a pivotal platform, driving innovation and showcasing technology, while fostering crucial industry engagements.
“The industry is embracing the unknowns of energy transition and security, hence driving collaborations,” it said.
Despite the collaborations, UOBKH Research expressed caution that most developments might not materialise in the near term.
It pointed out that that the O&G industry faces a constantly challenging role to meet rising energy demand and balance energy transition sustainably.
“The conference places a lot of emphasis on technological advancements that were revealed, with fit-for-basin technologies, innovations that spur greater project collaboration, productivity booster technologies, or services that enhance safety and environment,” it said.
While energy transition seems to progress slower lately, UOBKH Research expected companies to be more decisive in taking action on emission reduction now and therefore increasing collaborations within the industry. It believes these collaborations might bring innovations that may displace existing O&G offerings.
“In addition, reducing emissions and carbon capture and storage are potential new segments to consider, but there is still some barrier of access to funding due to environmental, social and governance reasons,” it noted.
Hence, UOBKH Research expected more industry collaborations as more vendors, even the small-scale ones, would be catching up in knowledge to introduce new services and equipment.
Additionally, UOBKH Research highlighted that project deliveries and stakeholder management were becoming increasingly crucial.
It said, on a global scale, there were concerns that non-Organisation of the Petroleum Exporting Countries supply growth might outweigh the coalition’s efforts.
“PETRONAS has a strict target to boost local O&G production from about 1.6 million barrels of oil equivalent per day (boepd) to two million boepd by 2025, though we still expect some slippage risks of upstream activities from oil majors to secure enough required assets to execute the jobs,” it said.
According to UOBKH Research, Sapura Energy Bhd currently has several rigs that are idle following their last jobs.
“In end-2023, this happened in the offshore wind sector as players incurred huge impairments as a result of supply chain delays, surging costs and interest rates,” it said. UOBKH Research named MISC Bhd as its top pick within the sector, as it believed that the market had overlooked the prospects of Bursa Malaysia’s largest shipping stock.
The brokerage’s optimistic take on MISC was attributed to the company’s potential involvement in green projects like liquid carbon carrier and retrofit initiatives, and its status as a beneficiary of increasing liquefied natural gas newbuild demand, particularly from Qatar.
