UOBKH Research has also maintained its “market weight” stance on the sector.
PETALING JAYA: Upstream oil and gas (O&G) players are expected to perform steadily in the second half of 2024 (2H24), supported by committed investments in existing projects.
However, a key downside risk is the potential impact on Petroliam Nasional Bhd’s (PETRONAS) earnings and its annual capital expenditure (capex) plans following Petroleum Sarawak Bhd’s (Petros) move to take over natural gas activities in Sarawak.
Petros is Sarawak’s state-owned O&G company.
In a note, CIMB Securities Research said clearer insights on the impact may only be available after the release of the PETRONAS Activity Outlook 2025-2027 this December and PETRONAS’ results for the financial year 2024 (FY24) in February next year.
“Our preliminary view is that any revisions to the capex plan could first impact drilling and offshore service vessel operators due to anticipated slower exploration activities.
“Hook-up and commissioning, engineering and fabrication work may also face delays with reduced new investments.
“Nonetheless, maintenance activities are likely to remain stable as they are generally operating expense-related, focused on brownfield operations and involve routine inspections and maintenance to maintain safety and efficiency,” it said.
As for the downstream segment, CIMB Securities Research expects the ongoing market challenges to constrain both the earnings potential and share price performance.
Petronas Chemicals Group Bhd
and Lotte Chemical Titan Holding Bhd are anticipated to face pressure on their margins as the excess supply situation is likely to persist, keeping average selling prices at subdued levels.
Meanwhile, Petronas Dagangan Bhd faces downside risk due to the government’s subsidy rationalisation efforts, with the full impact of diesel subsidy rationalisation in 2H24.
“Valuation-wise, the sector is currently trading at a 9.5 times forward price-to-earnings ratio, which is 0.5 standard deviation below its historical five-year average of 11 times.
“We believe this valuation is reasonable, given the mixed earnings outlook.”
Commenting on the third quarter (3Q24), CIMB Securities Research projected the O&G sector earnings to improve moderately by 3% to 5% quarter-on-quarter.
This was following a mixed earnings performance in 2Q24. CIMB Securities Research has maintained its “neutral” view on the O&G sector, with the top picks being Dayang Enterprise Holdings Bhd and Dialog Group Bhd.
Meanwhile, UOB Kay Hian (UOBKH) Research has also maintained its “market weight” stance on the sector.
It said the outlook of the floating production, storage and offloading (FPSO) industry is weighed against the energy transition.
“While the FPSO industry benefits from an all-time high backlog, we think players should sharpen their focus on decarbonisation or clean energy pathways, as we foresee diverging patterns in this ‘new field growth’ depending on various factors.
“It seems solar and wind will not be part of Bumi Armada Bhd and Yinson Production (the FPSO arm), even though wind is officially under SBM Offshore.
“MISC Bhd remains as a green transportation arm though it may surprise the industry with the ZEUS Power Station,” it said.
The research house further noted the sector’s trading and earnings outperformance up till 1H24 was justified due to rising vessel rates and catch-up in volume of work for maintenance and production enhancement.
“We continue to believe the catalysts are mostly priced in, while execution risks alongside transition will still prevail, especially with the local sector risks surrounding the PETRONAS-Petros saga and Brazil FPSO hiccups.”
