MIDF Research noted that profitability of companies involved in exploration and production is tied to the O&G prices.
PETALING JAYA: Local oil and gas (O&G) players should brace for a downturn in the upcoming second-quarter of financial year 2025 (2Q25) earnings season, says MIDF Research.
This was in line with the “significant slump” expected for the global energy sector. Wall Street has slashed earnings per share forecast for O&G companies by nearly 19%, leading to an expected 25.6% year-on-year decline in aggregate sector earnings for 2Q25.
Meanwhile, based on the S&P 500 Energy sector, four out of five sub industries are expected to see a decline in earnings, with the exception of storage and transportation.
“We opine that these forecasts are driven by lower O&G prices in 2Q25, reduced O&G trading, optimised activities to manage operational costs and scheduled maintenance,” stated MIDF Research.
The research house noted that profitability of companies involved in exploration and production is tied to the O&G prices, making the companies vulnerable to selling price pressures despite an increase in production and sales volume in 2Q25.
Meanwhile, O&G, services and equipment (OGSE) players, which have often shown strong performance, are at risk of a reduction in upstream capital expenditure for new projects and maintenance work.
“Although Opec+’s returning supplies to the market besides the United States and Europe working to add into its oil inventories are anticipated to increase production for the long term, offshore projects are likely to be few.
“We opine that OGSE companies will keep leveraging on ongoing, long-term contracts, while PETRONAS’ continuous domestic spending is expected to provide a partial buffer from any external impact on OGSEs.”
As for the midstream segment, MIDF Research expected liquefied natural gas (LNG) exports and data centres to be key catalysts, moving forward.
Globally, the demand for LNG is significantly boosted by the continued buildout and operation of LNG export capacity.
In Asia, LNG demand is projected to nearly double over the next 25 years.
As such, midstream companies are crucial for refining and transporting the gas to export terminals.
Another significant driver for the midstream players is the surge in power-intensive data centres, which creates new, substantial demand for natural gas, further supporting the need for midstream infrastructure.
In contrast to the expected decline in overall energy sector earnings, midstream – particularly natural gas-focused midstream – is anticipated to see a better relative performance.
“While the broader energy sector faces headwinds from lower commodity prices, the midstream segment’s business model, tied to volumes and long-term contracts rather than price, coupled with strong demand drivers like LNG exports and data centers, positions it favourably in 2Q25.
“We opine this will project positively for 2Q25 earnings of local midstream companies,” said MIDF Research.
Like the upstream players, the downstream segment will also feel the heat from headwinds perpetrated by the ongoing geopolitical conflicts, the macroeconomic uncertainties arising from US tariffs and the increased crude oil supply by Opec+ and non-Opec+ members which could lead to a surplus.
MIDF Research expected recovery to be gradual amid constraints by external challenges and company-specific headwinds.
“We expect stabilisation post-2Q25, in tandem with a more consolidated outlook based on the reduced risk premiums from the end of the trade tariffs deals and further de-escalation of conflicts in O&G-prone regions.
“Hence, we maintain ‘neutral’ on the overall O&G sector,” said the research house.
