Petronas' Activity Outlook for 2024-2026 outlines a target to maintain oil & gas production at 2m boe per day, consistent with existing levels. Anticipated increased upstream activities by Petronas will lead to a rise in drilling and offshore support vessel (OSV) operations in 2024. Significant upticks in upstream maintenance and hook-up and commissioning (HUC) man hours are expected to address Petronas' maintenance requirements. Engineering, procurement, construction, and commissioning (EPCC) for upstream projects is projected to remain relatively stable in 2024. This aligns with our earlier expectations, reinforcing our positive outlook on the upstream service segment for 2024. We remain NEUTRAL on the sector, with a continued preference for upstream service providers, especially those in brownfield projects. Our sector top picks are DIALOG (OP; TP: RM3.10), YINSON (OP; TP: RM3.39), and UZMA (OP; TP: RM1.22).

Petronas has released its activity outlook for 2024-2026 and below are the major takeaways: -

1) Target to maintain production. The group aims to sustain its production at 2m barrels of oil equivalent (boe) per day by 2025 and beyond. This goal will be bolstered by various projects, including Kasawari, Jerun, Rosmari-Marjoram, and Lang Lebah in Sarawak. In Sabah, Gemusut Kakap, Belud Clusters, Bekok, Tabu, and Seligi redevelopment projects are also expected to contribute to Petronas' production target. Due to underspending in previous years, the group's decision to largely maintain its production level is indicative of increased upstream spending in 2024-2026.

2) Drilling activities to continue its uptrend. Petronas aims to boost its rig utilisation from 24 rigs in 2023 to 28 in 2024, with a specific focus on jack-up rigs, increasing from 12 to 13. Looking ahead to 2024-2025, the jack-up rig demand is expected to rise further to 14 and 15, respectively. The group plans to drill a total of 99 wells in 2024, giving priority to development drilling. Consequently, we anticipate sustained growth in rig demand from 2024 to 2026, with rig utilization remaining consistently high (85% or higher) due to the limited availability of new build rigs in the market.

3) EPCC jobs to flattish in 2024, installation to pick up. Unlike drilling, the group anticipates a relatively stable demand for fixed structure EPCC jobs in 2024, with a specific focus on heavy (more than 7,500 mt) and light (less than 1000 mt) wellhead platforms (WHP). Local fabricators, with a strong track record in executing WHP-related EPCC jobs, are likely to secure the majority of these projects. Conversely, offshore installation works are set to significantly increas e from 5 lifts in 2023 to a total of 14 lifts, driven by demand from both the oil & gas and wind sectors. This uptick will benefit owners of transport & installation barges (T&I), despite the assets' lifespans already exceeding 10 years.

4) HUC and maintenance to boom in 2024. Petronas anticipates a substantial 90% increase in man-hours for HUC requirements, reaching 7.6m man-hours in 2024. The majority of these jobs have already been contracted, including the 1.8m man-hours initially planned for 2023 but carried over to 2024. Furthermore, man-hours for general facilities maintenance are projected to rise by 13% in 2024, totalling 12m hours, with a significant portion of the work already under contract. This reaffirms our expectation that Petronas will significantly enhance its upstream maintenance activities in 2024, compensating for lower-than-average spending in 2020-2022.

5) OSV activities will surge in 2024. In 2024, production supporting OSVs for brownfield operations are projected to require a total of 148 vessels, reflecting a modest 3% YoY increase. The rise in demand is primarily attributed to platform supply vessels (PSVs) and work boats & barges. Notably, there is a significantly higher anticipated demand surge of 29% YoY for drilling-supporting vessels in 2024. Anchor handling tug & supply (AHTS) vessels are expected to drive the majority of this demand increase, followed by PSVs. This positive outlook for OSV owners is further rein forced by the expected tight supply of vessels due to limited investments in new vessels in recent years.

Maintain NEUTRAL. The Petronas Activity Outlook (2024-2026) aligns with our expectations, indicating an upswing in activities for upstream service providers in 2024, except for EPCC players. OSV segment shows significant improvement in expectations in the current activity outlook (249 for vessels supporting drilling in 2024 in the current report compared to 187 in the previous year’s activity outlook). Among the OSV players, we believe ICON (NOT RATED) will be the key beneficiary due to its substantial AHTS and PSV fleet. Expected HUC man hours are also significantly higher than Petronas’ last year’s expectations and this bodes well for upstream maintenance players like CARIMIN (NOT RATED). Drilling segment activity looks strong in 2024 but is largely in line with Petronas’ previous year’s outlook. VELESTO (UP, TP: RM0.17) will benefit from higher daily charter rates but we are concerned about its operating cost increases.

We continue to advocate focus on the upstream services subsegment within the local oil & gas sector, especially in brownfield projects, to capitalise on the sustained increase in Petronas' upstream capex. The downstream segment does not appear promising in the short to medium term due to global demand concerns. Additionally, we favour the midstream segment, particularly tank terminals, as the market indicates signs of bottoming out, and the surge in projects related to low-carbon storage offers growth opportunities for tank terminal operators.

Source: Kenanga Research - 21 Dec 2023