Higher PETRONAS capital expenditure to spur sector

UOBKH Research said PETRONAS' domestic capex allocation for 2023-2027 appears “lacklustre” against the 2018-2022 levels of RM101bil.

PETALING JAYA: The higher domestic capital expenditure (capex) allocated by Petroliam Nasional Bhd (PETRONAS) for the next five years implies that activities in the oil and gas (O&G) sector will remain robust over the medium term.

This should benefit many O&G companies in Malaysia, and will likely continue to support investors’ interest in the sector.

However, the quantum of increase in PETRONAS’ domestic capex did not seem to excite some analysts.

The national O&G company on Wednesday revealed that its domestic capex for 2023-2027 would be RM113bil, which would translate into an annual average of RM22.6bil per year.

This represented an increase of 12% from RM101bil over the previous five years, or RM20.2bil per annum for 2018-2022.

RHB Research, which remained “overweight” on the O&G sector, said it was not “overly excited” over PETRONAS’ capex numbers for 2023-2027.

It explained in its report yesterday: “We are lukewarm on PETRONAS’ annual domestic spending guidance for 2023-2027 since the yearly amount of RM22.6bil is 9% to 11% lower than what was spent in 2018-2019 (pre-pandemic).”

This was also despite the average amount for 2023-2027 being higher than the annual capex spending of RM15bil to RM18.6bil in 2020-2022, the brokerage added.

Similarly, UOB Kay Hian (UOBKH) Research said the domestic capex allocation for 2023-2027 appeared “lacklustre” against the 2018-2022 levels of RM101bil, or an annual average of RM20bil, but RM25bil per year before the Covid-19 pandemic.

“Moreover, the plan is far lower versus PETRONAS’ 2013-2017 local capex of RM183bil (average: RM37bil per year),” the brokerage said.

UOBKH Research, which also retained its “overweight” call on the O&G sector, further noted that the five-year forward local capex reflected PETRONAS’ decreasing local capex mix over time versus Sabah and Sarawak oil majors, and necessitated overseas expansion.

“PETRONAS said the capex is to ensure energy security, but we are not surprised by this trend, as this reflects the inevitable transfer of PETRONAS’ business in Sabah and Sarawak to majors such as Petroleum Sarawak Bhd and Sabah Maju Jaya Sdn Bhd, as dictated in the commercial settlement agreements,” it said.

“Overall, we see higher activity levels, along with higher earnings volatility amid the structural changes,” it added.

UOBKH Research recommended “selective investments”, noting that while activity levels would grow, there were increasing risks of earnings volatility among service players with heavy local contract exposure, arising from renegotiations of service rates versus cost inflation and structural changes in the local O&G industry.

“But we still see trading upside in the sector as the oil price sentiment is expected to be stronger towards end-2023 (with the Brent crude oil price expected to reach US$90 (RM416) per barrel),” it said.

Among UOBKH Research’s favoured sector picks were Yinson Holdings Bhd, Malaysia Marine & Heavy Engineering Holdings Bhd (MMHE) and Dialog Group Bhd.

Yinson and MMHE were also listed as RHB Research’s top sector picks.

“While we remain upbeat on the overall level of O&G activities, we turn more selective on stock picks.

“We prefer companies with resilient earnings profiles, backed by solid order books,” RHB Research explained.

It projected an average oil price of US$85 (RM392) per barrel for 2023 and US$80 (RM369) per barrel for 2024.

“Overall, we are still positive on upstream services players, given the elevated activity levels. Drilling activities are guided to remain robust, similar to maintenance activities,” RHB Research said.

It added that it was also bullish on floating production, storage and offloading unit players due to the robust demand for their services, as well as their resilient earnings.

PETRONAS recently said it was maintaining a cautious outlook throughout 2023, given the risk of continued uncertainty and volatility in its business environment. In addition, it was also anticipating O&G prices to moderate, possibly lowering its profitability this year.

The group saw its turnover increase 16% year-on-year (y-o-y) to RM90.4bil for its first quarter ended March 31, 2023 (1Q23). However, its profit after tax increased by only 2% y-o-y due to higher costs.

During the period in review, PETRONAS’ capex spending rose 42% y-o-y to RM10.5bil, of which the upstream segment was the largest contributor (41%), followed by gas (22%) and Gentari (16%).

Meanwhile, Hong Leong Investment Bank (HLIB) Research deemed the capex for 1Q23 to be a “great start”.

As such, the brokerage projected a total capex of RM50bil for 2023.

“We believe that this would augur well for the local O&G sector, as most of the listed service providers in the O&G services and equipment (OGSE) space are heavily reliant on PETRONAS as a major client and would serve to be direct beneficiaries of this development,” it explained.

“We still think that 2023 will be a golden year for OGSE players – a laggard to the elevated oil price environment for the past year.

“However, we are also wary of cost hikes that are currently demonising the OGSE space due to cost inflation woes amid the heightened O&G demand with global supply chain disruptions, impacting the availability of oilfield equipment and spares,” it added.

HLIB Research retained its “neutral” stance on the O&G sector, with Dagang Nexchange Bhd and Wah Seong Corp Bhd listed as its top picks.

It projected an average oil price of US$75 (RM346) to US$80 (RM369) per barrel for 2023.

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PETRONAS , O&G , energy , investment , business , economy , growth , capex


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