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Upbeat outlook on O&G sector

Updated: Dec 29, 2022

  • ENERGY

  • Wednesday, 21 Dec 2022

PETALING JAYA: Industry observers and analysts are of the general opinion that 2023 could be a bright year for the oil and gas (O&G) industry, by and large mirroring the outlook that local integrated O&G titan Petroliam Nasional Bhd (PETRONAS) has cast on the prospects of the sector as well as its own.


Aside from the optimism by PETRONAS, experts said their hopeful outlook on the sector is also underpinned by factors including oil prices remaining elevated at current levels, the expected recovery in investment spending and improved activity levels from oil majors for next year, as well as undemanding valuations and buying opportunities throughout the O&G space.


Kenanga Investment Bank (KIB) Research said it is positive overall on the sector heading into next year, despite PETRONAS’ own warning that uncertainties in the energy market are expected to persist.


With PETRONAS mentioning it is expecting to utilise 26 drilling rigs in 2023, as the number of jack-up rigs is anticipated to increase from nine units to 12 and hydraulic work units (HWU) predicted to also rise to eight units from the present six, KIB Research analyst Steven Chan expects jack-up rig providers Velesto Energy Bhd and Uzma Bhd – who also operates the HWU space – to benefit.


The research outfit said Dayang Enterprise Holdings Bhd, the biggest player in the hook-up and commissioning (HUC) as well as offshore maintenance, construction and modification (MCM) segments, should also be a big beneficiary of the expected O&G crest next year.

“This is because PETRONAS is expecting to see a jump to five million man-hours in 2023 from only 3.4 million this year for the HUC segment.


“For the MCM segment, PETRONAS anticipates to see the number of man-hours jump to 11.9 million in 2023, from 8.7 million in 2022,” noted Chan in his report.


Other potential beneficiaries that the research house sees include Sapura Energy Bhd and Malaysia Marine and Heavy Engineering Holdings Bhd (MMHE) for the offshore fabrication segment, as well as Icon Offshore Bhd, Perdana Petroleum Bhd and Alam Maritim Resources Bhd who are providers of offshore support vessels.


Separately, sharing KIB Research’s upbeat sentiment on the O&G sector, Hong Leong Investment Bank (HLIB) Research went as far to say it believes 2023 would be a “golden year” for O&G service providers.


However, it did caution that supply and demand dynamics for oil could maintain parity over the first few months of next year, leading to more sideways movement in oil price for the first half of 2023 (1H23).


HLIB Research analyst Jeremy Goh said: “Based on our research on publications from multiple organisations such as the International Energy Agency, the Energy Information Administration (EIA) and Organisation of Petroleum Exporting Countries (Opec), we expect global oil demand and supply to be at parity around 100 million to 102 million barrels per day (bpd) in 1H23.


“However, we highlight that global crude oil demand could see upside possibility with China’s highly likely reopening in 2023. The EIA forecasts global oil inventories to fall by 200,000 bpd in 1H23 before rising by almost 700,000 bpd in 2H23.”


While there remains a number of factors that could lend to a continued increase in demand for oil in 2023, including lower production by Opec and its allies and the gradual relaxation of China’s zero-Covid policies, the research house predicts that oil would hover around the relatively lower range of US$85 to US$90 (RM377 to RM399) per barrel throughout the year, due to a weak macroeconomic environment and ample supply.


HLIB Research nonetheless noted that recent oil consumption data have surprised to the upside, which was especially apparent in non-Organisation for Economic Cooperation and Development regions, including China, India and the Middle East.


Companies-wise, the research unit echoed the views of KIB Research, forecasting companies such as Dayang, Velesto, Icon Offshore and Perdana Petroleum to do well, while at the same time also seeing a bullish 2023 for Petra Energy Bhd and Carimin Petroleum Bhd in the HUC and MCM segments.


HLIB Research, though, sang a more cautionary tune of the petrochemical segment, noting the fact that product spreads having come off their respective peaks as a signal that the petrochemical “super cycle” has passed.


“Spreads are lifting off their peaks due to additional new supply globally and the normalising of short-term supply shortage, on top of limited demand growth amid high commodity prices worldwide, coupled with stagflation risks,” its analyst Goh said.


He added that investors should stay off downstream petrochemical names amid the likely outcome of a petrochemical bear cycle in 2023.


Both research houses believe things should also look up for PETRONAS itself, with its capital expenditure (capex) being kept around the RM50bil mark in 2023, on healthy activity levels.


KIB Research said PETRONAS should have little problems fulfilling its capex and dividend commitments with a strong net cash position of RM103bil.


Bumi Armada Bhd is among the top picks for HLIB Research and KIB Research besides the aforementioned companies, with KIB Research also picking Petronas Chemicals Group Bhd while HLIB Research sees Hibiscus Petroleum Bhd among its top buys.


Meanwhile, although acknowledging that macroeconomic challenges such as broadening inflationary pressures, labour shortages and supply chain disruptions have yet to recede, PETRONAS said 2022 has seen the industry rebound strongly as oil prices reached its highest level against crude oil benchmark prices.


“The race by governments worldwide to reopen their economies as well as the removal of travel restrictions have contributed to a surge in demand despite the challenging economic landscape,” it said in its Activity Outlook 2023-2025 report, adding that it would continue to invest in business activities and growth projects.


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