Review

There were not many surprises in the Oil and Gas (O&G) sector’s 1QCY24 results. 5 out of 7 firms under our coverage reported results that came in within expectations (Figure 2).

The downstream sector continued to disappoint, with both PCHEM and LCTITAN registering results that were below expectations. Product spread remained weak as supply glut continued to drag the petrochemical segment.

Sequentially, core earnings for the sector surged 14.9% QoQ supported by better contribution from PCHEM due to lower operating expenses, as well as improvement at COASTAL following greater gas volume processed for its gas processing division (Figure 3). Nonetheless, overall core profit dropped 11.2% YoY in 1QCY24 due to lower contribution from COASTAL dragged by lower EPCC profit for gas processing division, as well as lower sales volume and sluggish product spreads for PCHEM.

Outlook

We maintain our Brent crude oil assumptions at USD85/bbl for 2024. We expect the oil price to be resilient, mainly supported by OPEC+ supply curbs. Saudi Arabia is adamant to maintain a floor to the oil price and is willing to continue unilaterally cut oil production to support the oil price. Meanwhile, demand is expected to pick up in China following stimulus measures to prop up its sluggish economy. Demand in advanced economies should also improve following the anticipated rate cuts by major central banks as inflation moderates.

On the back of resilient oil price, Capex into upstream exploration and production activities is expected to remain strong, benefiting VELESTO (jackup drilling rigs), PANTECH (pipes, valves and fittings), MISC (FPSO) and MHB (heavy engineering). We believe that the average selling prices (ASP) for petrochemical products could remain languish as China continues to expand production capacity to achieve self-sufficiency in petrochemical. Recovery of product spread seems unlikely if China continues its massive capacity expansion.

Recommendation

During this quarter, we have downgraded MISC from Buy to Hold due to lower upside potential following the increase in its share price.

We maintain Overweight on O&G sector. Our top picks for the sector are PANTECH (TP: RM1.23) and VELESTO (TP: RM0.33) as they are the beneficiaries of resilient oil price.

Source: TA Research - 5 Jun 2024