Kenanga Research has a “neutral” call on the O&G sector.
PETALING JAYA: Malaysia’s upstream segment of the oil and gas (O&G) sector could see further earnings weakness, although the downstream division may experience an inflection point should the oversupply environment become more manageable.
Kenanga Research stated that, based on the second quarter of financial year 2025 (2Q25) results, earnings seem to have peaked for the majority of local O&G stocks in financial year 2024 (FY24), as some sector companies reported weaker-than-forecast numbers.
“The FY25 earnings outlook seems to be weaker year-on-year (y-o-y) for the upstream service providers, and it seems to imply that earnings for the subsector as a whole are coming off a cycle peak in FY24, and we could not discount the possibility of further y-o-y weakness in FY26.”
Nevertheless, it noted meetings with sector companies give the general sense that FY25 and FY26 will likely still be profitable for upstream service providers, and hence, the share price impact to the service providers in the coming quarters if earnings underperform might be more manageable compared to previous downcycles.
Upstream service providers could also ramp up their dividend payouts due to their net cash balance sheets, which could in turn limit downside to their share prices.
The 2Q25 earnings of downstream companies continued to be weak, but midstream and retail or distribution segments appear to remain resilient amid the current uncertain global outlook.
The earnings of downstream companies like Petronas Chemicals Group Bhd
may have hit bottom and could improve if the measures taken by the industry worldwide help curtail the oversupply situation.
Kenanga Research stated downstream product prices still remained tepid and do not appear to be worsening further, a sign of finding a bottom at least.
“There are early optimisms on capacity rationalisations in the polyolefins segment, as South Korea and China are reportedly looking to reduce capacities, particularly the ones that are ageing and inefficient.
“In our view, while the second-half earnings outlook remains tepid, investors appear to have already looked beyond that and are looking forward to a potential recovery in FY26, as capacity cuts (or in China, capacity addition slowdown) might trigger at least a short-term up-cycle in polyolefin prices for a year,” Kenanga Research wrote in an O&G sector report.
Kenanga Research has a “neutral” call on the O&G sector but advised investors to keep a keen eye on the downstream space and watch out for news on petrochemical facilities in the coming months to ascertain whether the capacity plans follow through.
The research house promotes a barbell strategy for exposure to the sector, with investors advised to seek safer midstream names and nibble in downstream names for potential alpha gains. It believes a better time to relook at the O&G sector is probably in early 2026, as most of the negative outlook on FY26 earnings would have been priced in by then.
