PETALING JAYA: Malaysia’s integrated oil and gas or O&G sector is expected to see a period of steady, near-term earnings support, although prospects for a sustained upcycle remain limited amid cost pressures and cautious capital spending.
The sector’s immediate trajectory will largely depend on the resolution of ongoing geopolitical tensions and how effectively companies navigate volatile input costs and uneven margin dynamics across upstream and downstream segments.
Market participants are expected to favour stability over expansion, particularly in an environment marked by uncertainty.
According to RHB Research, while recent geopolitical tensions have driven a sharp spike in oil and petrochemical prices, this could just be a short-term dislocation rather than a structural shift.
“As such, we maintain our ‘neutral’ stance on the sector, with preference for defensive midstream names offering earnings visibility,” the research house added.
Its base case assumes that the current Middle East conflict will be resolved within four to six weeks from the point of escalation, although petrochemical markets are likely to remain tight for a further two months due to supply chain lag effects.
“This should support near-term earnings across the sector, driven by elevated Brent crude oil and petrochemical prices,” it said.
However, it cautioned that a more prolonged conflict scenario could keep prices elevated for longer or even push them higher, thereby extending the period of tighter supply conditions and bolstering earnings beyond initial expectations.
Despite the supportive price environment, the benefits are unlikely to be uniform across the value chain.
The research house flagged that higher oil and feedstock costs may not necessarily translate into improved downstream profitability.
“Oil and feedstock cost spikes may not translate into downstream margins expansion,” it said, highlighting that Brent crude oil prices have surged above US$100 per barrel while naphtha prices have similarly risen beyond US$120 per barrel.
Although higher product prices provide some cushion, the sharp increase in input costs and lag in price pass-through mechanisms are expected to cap margin expansion for downstream and petrochemical players.
Consequently, upstream operators are likely to be the primary beneficiaries, while downstream segments remain under pressure.
On the investment front, capital expenditure (capex) trends indicate a shift towards prudence rather than aggressive growth.
Petroliam Nasional Bhd (PETRONAS) recorded a 23% year-on-year decline in financial year 2025 (FY25) capex to RM41.6bil, down from RM54.2bil in FY24, reflecting a more measured pace of spending following several years of elevated investments.
“Its softer earnings trajectory suggests future spending is likely to remain disciplined rather than expansionary,” the brokerage said, signalling limited catalysts from large-scale project rollouts in the near term.
Against this backdrop, defensive midstream players continue to stand out.
MISC Bhd
and Dialog Group Bhd are identified as preferred picks, underpinned by their exposure to contracted revenue streams that provide earnings visibility even as upstream profitability moderates.
RHB Research maintains a “buy” call on MISC with a target price of RM8.50, while Dialog is also rated “buy” with a target price of RM2.80. The research house noted that such names offer relative insulation from commodity price volatility compared with more cyclical segments.
Recent quarterly earnings have reinforced the view of a stable but unexciting operating environment.
