Kenanga Research said the upstream services market saw a significant uptick in activity in 2024 and it expects this trend to continue into 2025.
PETALING JAYA: Kenanga Research has maintained its “overweight” rating on the oil and gas (O&G) sector, citing strong fundamentals despite temporary volatility in oil prices.
The firm trimmed its Brent crude futures forecast to US$80 per barrel from US$84 for 2024 and US$77 per barrel from US$80 for 2025 due to a weaker global demand outlook, particularly from China.
“Nevertheless, we believe the Organisation of the Petroleum Exporting Countries and allies, together called Opec+, will push to defend crude prices at current levels, even if it requires extending production cuts into 2025 should demand weaken further,” Kenanga Research said.
In its base case, Kenanga Research expects crude demand to increase by 1.4 million barrels per day (bpd) in 2025, which is slightly higher than the 1.3 million bpd expected by the US Energy Information Administration or EIA.
This could result in a slight market surplus, assuming supply grows by 2.4 million bpd, supported by a gradual unwinding of Opec+ production cuts, it added.
“We maintain the view that Opec+ will not allow Brent crude prices to trade below US$70 per barrel as this would negatively impact their national budgets.”
Particularly, the research firm remains optimistic about the prospects for local upstream investment due to the defensive nature of upstream maintenance and pipe-coating players.
The research firm said the upstream services market, particularly maintenance and hook-up and commissioning services, saw a significant uptick in activity in 2024 and it expects this trend to continue into 2025.
“The Pan Malaysia umbrella contract, valued at up to RM10bil with a duration of 10 years, could be up for grabs before the end of 2024 as Petroliam Nasional Bhd (PETRONAS) and other oil producers look to award the next cycle of major upstream maintenance jobs which have been delayed for two years already.
“Hence, we believe that the new cycle of contract could be awarded and if not PETRONAS will award another year of contract extension with favourable contract terms, both still a boon to upstream maintenance activities and margins.”
The research firm believes Dayang Enterprise Holdings Bhd
could be in pole position to win the majority of the umbrella contract due to its project execution track record as well as its advantage as a Sarawak-based contractor.
In its report, Kenanga Research also pointed to strong demand for energy infrastructure, particularly pipelines.
Citing Mordor Intelligence, it said over 122,000km of pipelines are either under construction or in the planning stages globally, with most projects focused on natural gas infrastructure, especially in the Asia-Pacific and North American regions.
It said the global pipeline network is ageing, with up to 40% of pipelines worldwide being over 40 years old, creating a structural demand for pipe replacements.
“As long as crude prices remain conducive, spending on pipe-coating will ramp up. The pipe-coating industry will benefit from this structural trend, with incumbent players such as Wasco Bhd poised to capitalise on this due to their significant market power, as the industry is dominated by three to four key players globally.”
As for the offshore support vessel (OSV) market, Kenanga Research said it is also seeing strong demand, with domestic upstream service providers reporting an uptick in activity.
It expects demand for OSVs to continue growing, especially for brownfield maintenance jobs, assuming oil prices stay above US$70 per barrel.
“We do not discount the possibility of further upside in daily charter rates in 2025 given the tight supply in the market. Given the strong charter rates, we think the next leg up could be shipbuilding.”
Kenanga Research said PETRONAS has maintained a disciplined approach to capital expenditure (capex) amid macroeconomic uncertainties.
“With its operating cash flows intact and an approved dividend of RM32bil for financial year 2024 (FY24) compared to RM40bil in FY23, we believe the group can still ramp up its domestic investments even if it underspends on its RM60bil annual capex target.” The research firm said Sarawak remains a key strategic focus for PETRONAS.
It said these developments will allow PETRONAS to redirect more of its capex budget into the domestic market, which has been under-invested in the past five years, to prevent a steep natural production decline in Malaysia.
Regarding ongoing discussions between PETRONAS and Sarawak over the state’s gas distribution, Kenanga Research said both parties remain strategic partners in developing the country’s hydrocarbon resources.
“We expect upstream capex in Sarawak’s offshore areas to remain intact in the longer term, although slight delays may occur in the short term as the details of the agreement are still being finalised.
“In our view, this would be a short-term hiccup for upstream service providers and they are in a good position in the upstream market due to the tightening availability of contractors, and we anticipate a ramp-up in activities in 2025 overall.”
