RHB Maintains “Overweight” In Oil and Gas

RHB has maintained a “overweight” recommendation for the oil and gas sector adding that upward revision of activities guidance in the latest Petronas Activity Outlook (PAO) 2022-2024 may suggest that upstream activities should recover with greater momentum in 2022.

RHB said that it estimates Petronas’ capex spending to be MYR40-45bn in 2022, with a continuing re-deployment of resources to renewables.

It said in the PAO 2022-2024, Petronas mostly made upward revisions on 2022-2023 activity levels.

It also said that the higher number of development projects – 90 brownfield and 42 greenfield vs last year’s disclosure of 74 and 34 – with more fields and to-be-developed stages and field development plans (FDPs) sanctioned for execution.

It said that Sub-segments with higher activities in 2022; Semi-submersibles and drill ships; pipeline installations (pipelay barges); iii) hook-up & commissioning (HUC); iv) maintenance, construction & modification (MCM); and v) well decommissioning.

It said that there was a surprise upgrade on drilling spaces to positive from steady over the medium term (after 2024), while the outlook of most sub-segments remained steady/modest. All in, maintenance services-related players should benefit from higher work orders.

It said that the Hydrogen venture could suggest a new growth area, as Petronas is targeting to kick-start domestic hydrogen projects by 2024 – starting with blue, then green hydrogen.

“Oil & gas services and equipment (OGSE) players are encouraged to collaborate in scaling up their hydrogen businesses with the national oil major,” it said.

It said that it expects further downward revisions in crude oil demand by major agencies in the coming months due to the re-implementation of lockdown measures in response to the emergence of new COVID-19 variants.

It said that it believes the recent price volatility in Dec 2021 has factored in the impact of Omicron to a certain extent. Supply pressure will remain in 2022, but OPEC’s strategy is still very price-positive – especially when oil prices are down.

It said that this is because the cartel is ready to adjust production levels to support prices. All in, we expect oil prices to stabilise at USD69.00 and USD65.00 per bbl in 2022 and 2023.

RHB Said that its long-term oil price assumption remains at USD60.00 per bbl. Higher capex spending in 2022. Petronas is allocating an annual average capex of MYR20bn for upstream activities between 2022 and 2027, of which 40% is for the international division.

This points to a strong increase from 9M21’s MYR9.4bn, and we believe the domestic upstream space will be the beneficiary. Petronas spent more than MYR300 million for new businesses, ie “Step Out” projects that include specialty chemicals, renewable energy (RE), and hydrogen plays.

It said that it believes 2021’s full-year capex could land below the targeted MYR39-40billion while the 5-year annual capex is likely to be maintained at MYR40-45bn – premised on an oil price view of USD55.00-60.0 per bbl.

On its stock-picks, its top picks were Petronas Chemicals Bhd (PCHEM) and Bumi Armada Bhd (BAB) were the stock picks. It said that PCHEM’s valuation remain attractive as it is trading below 5-year mean.

It said that it sees further earnings upside if the moderation in ASPs is less steep than anticipated, and PCHEM can kick-start the Pengerang Integrated Complex (PIC) project smoothly.

It said that Bumi Armada Bhd is our preferred small-mid-cap pick, largely on its resilient earnings from operating FPSOs and improving balance sheet. Its risk-reward profile remains attractive, as our TP implies FY22F P/E and P/BV of 6.5x (below its 5-year mean of 7.2x) and 0.84x (slightly below +2SD from its 5-year mean at 0.9x).

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