Kenanga Research remained NEUTRAL on the oil & gas (O&G) sector for its forecasts of the year ahead (CY24), with a continued preference for upstream service providers, especially those in brownfield projects.
“We trim our CY24 Brent crude price assumption to USD84 per barrel from USD86 per barrel to reflect a slightly weaker demand outlook, particularly, from China.
“Nevertheless, we anticipate the upstream capex of Petronas, centred on brownfield projects, to sustain its upward trajectory in CY24 as its cost structure could easily accommodate slightly lower Brent crude prices.
“On a less encouraging note, the prospects of the downstream segment will remain subdued on weak global demand, while the midstream
segment (in terms of tank terminal spot rates) may have bottomed out,” it said in its Sector Update today (Dec 27).
Elaborating on the forecast for CY24, the research house said upstream crude oil price is likely to hold up in CY24.
“At USD84 per barrel, the oil price will be comparable to the estimated average of USD83 per barrel in CY23. (This is) underpinned by an expected narrowing in the crude market’s surplus year-on-year (YoY) in CY24 to 0.3 million barrels per day, compared to 0.5 million barrels per day in CY23.
“Also, our base case assumes oil demand to grow by 1.2 million barrels per day in CY24, with production increasing at a slower rate of 1 million barrels per day.”
Kenanga said its CY24 crude oil price assumption is considerably more conservative than the EIA’s forecast of USD93 per barrel (in its Nov
CY24 outlook publication) due to its slightly more conservative assumption on global crude demand compared to EIA’s assumption of 1.4 million barrels per day YoY in CY24.
“In our view, demand for crude oil will remain the major concern for the oil market in CY24, primarily due to uncertainty in demand from China and the US, rather than supply. Hence, the upside to crude oil prices remains capped.
“Nevertheless, we believe the downside to Brent crude prices is also limited, as OPEC+ has shown resolve in cutting production to support prices,” it added.
Meanwhile, Kenanga said it anticipated Petronas’ upstream capex target to sustain its upward trajectory in CY24 as its cost structure could accommodate Brent crude prices of as low as USD75 per barrel.
“Anticipating a CY24 capex expenditure of around RM60 billion, with a larger proportion allocated to upstream activities, we expect Petronas
to address the aging infrastructure of oil production platforms in Malaysia.
“This strategic move is anticipated to benefit upstream service providers under our coverage, particularly amidst the reduced supply of upstream contractors due to underspending by Petronas and other oil producers since the onset of Covid-19.
Other projection by the research house is that Petronas’ upstream capex will continue to be directed toward brownfield projects (existing fields or extensions to producing oil fields) due to their lower risk profile and capex requirements.
Consequently, maintenance players like Uzma Bhd are poised to benefit more than offshore supply vessel (OSV) and drilling rig players, at least in CY24, Kenanga added.
It also anticipated Petronas to focus on upstream capex, while also balancing it with new energy investment.
“Looking ahead to CY24, we anticipate a similar capex breakdown, with no significant shift compared to the observed pattern in 9MFY23 (no apparent crowding out of upstream capex by new energy investments).”
Other than that, it also projected that OSV and drilling rig players are set to benefit from a supply squeeze.
“Unlike the historical correlation between OSV and rig daily charter rates (DCRs) and greenfield capex by oil producers, we expect DCRs to remain robust in CY24 due to supply tightness, both locally and globally.”
However, Kenanga reckoned that labour costs may limit the upside from DCR (earnings improvement for OSV and drilling rig owners).
“Therefore, we believe this subsector deserves closer monitoring to determine the upside potential in earnings in CY24,” it added.
Elaborating its projections for midstream and downstream sector, the research house said the downstream outlook is largely benign, with the polyolefin market exhibiting tepid conditions attributed to global demand concerns, especially from China amid a growth slowdown.
“We anticipate this trend to persist into CY24, restraining the recovery of polyethylene and polypropylene prices, which are
not expected to significantly exceed USD1,000/MT.
“On the supply side, Wood Mackenzie estimates a 25% increase in ethylene and propylene capacities from CY23 to CY30, with China contributing half of the growth.”
Aside from that, it anticipated urea prices to experience a flattish trend in CY24, remaining at USD350/MT, in line with the average prices reported in CY23.
“(On the other hand), the tank terminal market presents opportunities with rising demand for storage of new energy and sustainable feedstocks.
“Dialog Group Bhd is well-positioned for long-term growth in low-carbon product storage capacity, particularly in Pengerang, Johor. We believe that spot storage rates have reached their low point in CY23, and we anticipate a gradual recovery in CY24 as demand for storage improves.”
Kenanga added it also forecasted a decline in refining margins as the tight global refining is expected to ease with the commissioning of new refining capacities.
“The period of CY22-CY23 witnessed a lag in refining capacities catching up with the recovery in demand for diesel and gasoline (refined products) due to the substantial refining capacity being shut down during the Covid-19 crisis.
“Subsequently, more capacities have been restarted due to the surge in refining margins, and additional capacities are expected to come online in CY24.
“Consequently, we expect refining margins to trend lower in CY24 due to growing concerns about the demand for gasoline and diesel amid a weak macro outlook,” added the research house.
To conclude, Kenanga said it advocates the focus on upstream services subsegment within the local O&G sector, especially in brownfield
projects, to capitalise on the sustained increase in Petronas’ upstream capex.
“The downstream segment does not appear promising in the short to medium term due to global demand concerns.
“Additionally, we favour the midstream segment, particularly tank terminals, as the market indicates signs of bottoming out, and the surge in projects related to low-carbon storage offers growth opportunities for tank terminal operators,” it said.
Its top picks for the sector include Dialog (OP; TP: RM3.10) underpinned by recovery in demand for independent tank terminal storage, active diversification into upstream production assets and the still significant expansion potential in Tanjung Langsat and Pengerang in Johor.
Kenanga also picked Yinson Holdings Bhd (OP; TP: RM3.39) due to a strong FPSO order book pipeline, a strong project execution track record and it being one of the first local O&G company investing in green technology; as well as Uzma (OP; TP: RM1.22) due to it benefiting from the ongoing upcycle in upstream activities, actively engaging in sustainable businesses and anticipated margin improvements in its upstream O&G division.
