MBSB Research retains a wait-and-see approach and has a “neutral” call on the sector.
PETALING JAYA: The demand supply fundamentals of the oil and gas (O&G) sector remain bearish and have yet to present a sufficiently compelling risk-reward profile to justify broad accumulation.
MBSB Research, therefore, retains a wait-and-see approach and has a “neutral” call on the sector.
It added crude oil prices closed out 2025 under pressure amid elevated global inventories, persistent supply growth and modest demand expansion, reinforcing expectations of a surplus market environment.
The benchmark Brent crude contract closed out 2025 at an average price of US$61.55 per barrel in December, down 18.48% year-on-year (y-o-y).
“This dynamic pricing continues to cap upside for upstream and downstream segments that are directly exposed to crude price and petrochemical movements.
“Structural uncertainties persist, including the lack of sustained upstream capital expenditure or capex visibility, and the unresolved Petroliam Nasional Bhd- Petroleum Sarawak overhang, which continues to weigh on investment appetite,” MBSB Research stated in a sector report.
In the upstream space, the weaker price outlook for crude oil due to rising output by the Organization of the Petroleum Exporting Countries and its allies (Opec+) and non-Opec producers, barring geopolitical tensions in the Middle East, has led to a more disciplined capital spending behaviour among industry players.
Natural gas, however, is a bright spot as sustained demand for liquefied natural gas (LNG) from exports has supported prices and sustained capex spending by producers. Natural gas prices rose 1.46% y-o-y in 2025.
Data centre build-up to cater to the artificial intelligence spending will require power generated from LNG feedstock.
Midstream players in the LNG space such as regasification terminals and LNG storage facilities are also benefiting from the structural demand for natural gas and its role as a transition fuel.
The rising output of crude also means shipping or tanker operators continue to show encouraging performances despite the headwinds.
The downstream segment of the O&G sector is expected to continue to face a challenging environment in 2026 with petrochemical producers weighed down by poor pricing power due to excess supply and unfavourable margins across most commodity chemicals.
Unsurprisingly the KL Energy Index declined 6.76% y-o-y in 2025 as compared to the 2.3% increase seen in the benchmark FBM KLCI.
The energy index fall reflected the cumulative impact of softer commodity prices, unexciting earnings across upstream and services providers, and a more cautious investment environment were adopted within the sector, MBSB Research summarised.
“Our preference in the O&G space is the midstream due to its recurring business model, which translates into stable earnings and predictable cash flow insulated from the direct impact of volatile commodity prices,” the research house noted.
Its top pick in the O&G sector is Dialog Group Bhd
with a “buy” call and target price of RM2.17 a share. MBSB Research favours Dialog due to its defensive midstream exposure, anchored by its extensive tank terminal and infrastructure assets.
The group’s earnings profile is largely underpinned by long-term take-or-pay contracts and lease arrangements, providing stable and recurring cash flow that are largely insulated from short-term crude price volatility, it added.
