Strong Earnings Momentum Favourable For Oil & Gas Players

The oil and gas sector maintains robust earnings momentum, prompting Kenanga Investment Bank to reiterate its OVERWEIGHT call. Despite a slight sequential dip in performance, most companies within the industry met or exceeded expectations in 1QFY24, with a particular highlight on offshore support vessels (OSV) and midstream segments.

Kenanga’s analysis, in a note today (June 18), revealed a positive outlook for Brent crude prices, projected to average USD84 per barrel in 2024. This price level is conducive to sustained upstream spending by oil majors, particularly as Petronas ramps up its domestic investments. The upstream services sub-segment is expected to shine in 2024, driven by Petronas’s increased spending. Notably, Petronas’s capex is projected to hit RM60 billion in 2024, significantly emphasising upstream investments to counter natural production declines.

Key players like DIALOG, YINSON, and VELESTO stand out as top picks in the sector. DIALOG is poised to benefit from recovering spot tank terminal markets and improving margins in its specialist products and plant maintenance businesses. The company’s strong performance in 1HFY24 indicates bottomed-out margins, with expectations of further gains as cost structures stabilize. YINSON is set for growth, with multiple FPSO projects scheduled for delivery in the next two years, demonstrating strong project execution capabilities. VELESTO remains a proxy for the bullish jack-up rig market, supported by regional and global demand, particularly as new rig supply remains limited.

The OSV sector, particularly dynamic positioning 2 (DP2) vessels, showed resilience even during the traditionally weak monsoon season. This trend, coupled with sustained high daily charter rates (DCR), is expected to continue as no significant overbuilding of new OSV vessels is anticipated. This stability supports strong fundamentals for OSV players.

Looking ahead, the oil and gas sector is set to benefit from favourable macroeconomic conditions and Petronas’s strategic focus on local upstream investments. The bullish trend in upstream services is expected to extend to the anchor handling tug & supply (AHTS) sub-segment, driven by improving contract terms and higher demand. Meanwhile, the downstream outlook remains tepid due to global overcapacity and a slow recovery in demand, though early signs of recovery are visible in the speciality chemical market.

For investors, the favourable macro-outlook and strong fundamentals of upstream service providers and midstream players present a compelling case. DIALOG, YINSON, and VELESTO are particularly well-positioned to capitalize on these trends, making them attractive investment opportunities within the oil and gas sector.

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