We maintain an OVERWEIGHT rating on the sector. Our average Brent crude forecast is reduced to USD77/bbl from USD80/bbl for 2025, with a newly introduced forecast of USD74/bbl for 2026. The market has largely priced in weak crude demand growth and non-OPEC supply ramp-up, but we see potential for upside surprises in demand, particularly from 2H25, as the impact of monetary easing in China and Europe gains traction. Our bullish stance on upstream services stays intact, with a focus on maintenance-driven segments due to their favourable risk-reward dynamics. We are not overly concerned about the PETROS-Petronas gas agreement issue, as any Petronas capex cuts are likely to be smaller than anticipated, while regional activities are expected to increase in 2025. For downstream, we adopt a more bullish view, anticipating a short upcycle in 2025, driven by the typical 3 -year cycle of global manufacturing recovery after two years of slowdown. Our sector-top picks are recently-upgraded PCHEM (OP; TP: RM5.47), DAYANG (OP; TP: RM3.80) and KEYFIELD (OP; TP: RM3.18).

1. Upstream

Brent crude price forecast maintained. We trim our 2025 Brent crude forecast to USD77/bbl (from USD80/bbl previously) and introduce a 2026 forecast of USD74/bbl, slightly above the US Energy Information Administration's (EIA) estimates (2025: USD74/bbl) as we factored in a weaker demand outlook in 2025 especially in 1H25. Our relatively more optimistic view compared to the consensus stems from the belief that the market has largely priced in a crude production surplus for 2025, while demand growth assumptions remain overly conservative. The EIA's December 2025 report forecasts global oil consumption to grow by 1.3m bbls/day, below the pre-pandemic 10-year average of 1.5m bbls/day and slower than the recovery pace in 2021-2023. With Europe and China expected to adopt financial easing measures in 2025, we see potential for positive surprises in crude demand growth.

Bearish crude supply increase outlook already priced in. We maintain our 2025 Brent crude forecast at USD80/bbl and introduce a 2026 forecast of USD74/bbl, slightly above the US Energy Information Administration's (EIA) estimates (2025: USD74/bbl). Our relatively more optimistic view stems from the belief that the market has largely priced in a crude production surplus for 2025, while demand growth assumptions remain overly conservative. The EIA's December 2025 report forecasts global oil consumption to grow by 1.3m bbls/day, below the pre-pandemic 10-year average of 1.5m bbls/day and slower than the recovery pace in 2021-2023. With Europe and China expected to adopt financial easing measures in 2025, we see potential for positive surprises in crude demand growth. China and Europe accounts for 25% of total crude demand hence any 1% upside to demand from the two regions could provide 0.25% increase in world demand.

Awaiting details on PETROS-Petronas gas agreement. According to The Star, discussions on gas distribution in Sarawak between Petronas and PETROS have concluded, with the government now refining the agreement's details and implications. We estimate that any potential capex cut by Petronas due to this agreement would not exceed RM10b annually, a modest reduction from its projected RM60b per year. We believe that the calculation is justified, considering that Sarawak must still pay for the LNG infrastructure previously developed by Petronas, including LNG trains and liquefaction plants. Additionally, we believe it is in the mutual interest of PETROS and Petronas to eventually ramp up upstream investments to maximise their long-term revenue potential.

Other upstream players are still ramping up spending. According to Fitch Solutions, Southeast Asia’s national oil companies (NOCs) are projected to increase their combined capex by 29% YoY to USD31b in 2025, driven by 58 greenfield projects and 22 field expansions. According to Reuters, PTTEP plans to allocate USD5b in 2025 as part of its USD21.2b five-year plan, focusing on key assets and overseas projects, with the Lang Lebah gas field in Sarawak’s SK410B block expected to reach a final investment decision. Petrovietnam targets double-digit growth, implying higher capex, while Indonesia’s Pertamina aims to increase oil and gas output by 4-5% YoY, signalling sustained investment momentum. Overall, regional NOCs remain in capex expansion mode, and once PETROS’ gas agreement details are finalised, Petronas could ramp up its spending by 2H25.

Upstream maintenance umbrella contracts have finally been awarded. In recent months, Pan-Malaysia contracts have finally been awarded after years of one-year extensions, offering a more predictable long-term outlook for upstream maintenance players. According to The Edge Malaysia, the Pan-Malaysia umbrella contract is valued at up to RM10b over 10 years, though we believe the total value could exceed this if Shell’s packages are included. For instance, DAYANG (OP; TP: RM3.80) secured two packages from Petronas worth RM3b over five years for the firm period and an additional package from Shell potentially valued at RM1b over five years. Other players like T7, Sapura Energy, and Carimin have also been awarded packages under this structure. As a result, we expect upstream maintenance activities to sustain growth into 2025.

Offshore support vessel market is still strong, especially the maintenance-related vessels. The domestic upstream service players are witnessing a robust pick-up in demand from Petronas and other oil producers. Short-term daily charter rates (DCR) for accommodation work boats (AWB) have surged to RM150,000/day for charters of three months or less, surpassing the 2013–2014 bull market levels. However, mid-sized anchor handling tug supply (AHTS) vessels (~5000 bhp) are transacting at RM40,000/day or below, still shy of their previous peak of RM47,000/day, reflecting continued demand for brownfield maintenance jobs over greenfield projects. From a risk-reward perspective, we recommend focusing on maintenance-driven OSV players like KEYFIELD (OP; TP: RM3.18), which stand to benefit from immediate DCR hikes. Greenfield-driven OSVs (e.g., AHTS) could see improvement in 2H25 as the PETROS-Petronas overhang diminishes with the finalisation of the gas agreement.

2. Downstream

Where are we in the cycle now assuming a similar pattern will follow? Based on historical trends, 2025 marks the third year of the polyolefin price cycle, suggesting a potential uptrend. Adding to this, the US ISM Purchasing Managers Index (PMI) has been in a downtrend since 2022, consistently hovering below the 50 level during 2023 and 2024, indicating prolonged contraction in industrial activity. In Exhibit 2, the positive PMI trend has been moving in tandem with the YoY improvement in polyolefin prices, hence we believe investors should look out for a potential inflection point in 2025.

Industry players have become cautious on their productioncapacities amid the downturn. With the exception of China, multiple major players have announced plant shutdowns or review on existing capacities due to the negative economics generated by their older plants amid the petrochemical price downcycle since 2023. Exxonmobil Chemical France will shutter the steam cracker and close chemical production at Gravenchon by end-2024 according to Reuters. It also reported that Formosa Petrochemical, which is operating one out of three crackers for 2024, is not looking to make any new investments in the near term due to challenging market conditions. This could help to partially ease the additional supply pressure from China in the coming years. This is also an indication that among global industry pla yers, the appetite to expand capacity is reaching a low point with the exception of China, which has been well expected since 2018.

Petrochemical capacity could tighten slightly in 2025. We see a potential parallel to 2018 emerging in 2025, particularly for PCHEM, which is set to undergo a major turnaround for its PC olefins cracker. Globally, plant turnaround activities are expected to increase compared to 2023-2024 levels, driven by deferred maintenance and ageing infrastructure. Notably, 40-50% of global petrochemical capacity is sourced from plants over 20 years old, with Europe and North America accounting for a significant proportion due to their earlier industrial maturation. While this ageing capacity remains below the historical peak of 60-70% seen in the 1990s, and exact maintenance schedules are opaque for competitive reasons, the market could face tighter supply conditions in 2025. This would be driven by increased maintenance needs and a higher likelihood of unplanned shutdowns, potentially tightening the supply-demand dynamics more than anticipated. After considering the sustaining increase in supply from China, we have taken a more conservative approach and believe that in 2025 poly olefin prices will generally improve to USD1,150/mt levels (from USD950/mt instead of USD1,400/mt (high achieved back in 2021).

Petrochemical plant turnarounds are also cyclical. Global petrochemical plant turnaround activities tend to be cyclical, alternating between years of lower and higher maintenance levels. This is primarily driven by the operational requirement for major maintenance cycles, typically occurring in the 3rd or 5th year of a plant's operation. During years when a significant number of plants reach these intervals, maintenance activities spike. With the capacity expansion wave from 2018 to 2022, particularly in China and the Middle East, this means many plants commissioned during that period are now approaching their first or second major maintenance cycles. Concurrently, regions like the US and Europe, where a large portion of petrochemical capacity was built in the 1980s and 1990s, are dealing with ageing plants requiring more frequent maintenance. Combined, these factors point to a potential surge in plant turnaround activities in 2025.

We believe the downstream segment, despite facing a structural downtrend in the long term, may see prices surprise on the upside in 2025 due to the cyclical nature of chemical prices. This potential rebound could be driven by two key factors: (1) tighter-than-expected short-term supply as plant turnaround activities rise globally, particularly in newer plants in China and the Middle East undergoing their first major maintenance cycles, and in ageing plants in Europe and the US; and (2) stronger-than-anticipated demand recovery from China and Europe, supported by a cyclical rebound in manufacturing activity and potential economic easing measures. As such, we see opportunities for a tactical relook into the downstream segment, with PCHEM as a preferred proxy given its favourable feedstock cost structure and low investor expectations.

Our sector top picks are: -

i. PCHEM: The petrochemical market appears to be bottoming, with a potential global business cycle recovery in 2025 driven by financial easing initiatives in China and Europe. Additionally, we believe the bear case for the Pengerang Integrated Complex (PIC) is already priced in, setting the stage for potential upside surprises in 2025.

ii. DAYANG: The company is well-positioned within the upstream brownfield maintenance segment, specialising in hook-up & commissioning (HUC) and topside maintenance. Its recent win of three Pan-Malaysia packages with larger work scopes solidifies its growth trajectory. Further, its marine division stands to benefit from the booming offshore support vessel (OSV) market, boosting overall earnings growth.

iii. KEYFIELD: A strong proxy for the maintenance-focused upstream market, KEYFIELD leverages its younger fleet of accommodation work boats (AWBs) with premium specifications that command higher DCRs. The OSV upcycle, especially for maintenance-related vessels, is expected to extend into 2025 given the slow pace of capacity expansion in the market.

Source: Kenanga Research - 10 Jan 2025