• Low global oil inventories limiting downside risk to oil price; Brent to average USD75/bbl in 2025. We opine that recent weakness in oil price was dragged by weak sentiment over potential inventory build-up in 2025, blaming on the weak demand growth and stronger non-OPEC production outlook. Nonetheless, the global oil inventories that remain constrained will limit the downside, in our view. According to IEA, oil inventories stood at 2,778 mn bbls in Oct 2024 which is 91.6 mn bbls below 5-year average. Overall, we expect benchmark Brent oil price to average at USD75/bbl in 2025. The market will also be supported by delay in OPEC+ plan to ease the production cut by 2.2mn bpd to begin in April 2025 (from Jan 2025). The group also extended the period to unwind all these cuts until Sep 2026 (from end 2025).

• Petronas’ commitment to maintain Malaysia O&G Production. Petronas previously has guided that it will spend a much higher CAPEX of RM300bn (or average annual CAPEX of RM60bn p.a.) for 2023-2027. This is significantly higher than RM208.5bn CAPEX spent over 2018-2022. Given its commitment to maintain Malaysia’s oil and gas production at 2mn boepd, we think it is going to maintain its CAPEX allocation towards Upstream domestic project of at least 20%. As such, we expect Petronas to spend at least RM10bn in 2025. This is better than the downturn seen in 2017-2018 with annual CAPEX spending stood at RM5.5- 6bn. We also think this is fair to reflect the risk pertaining to the on-going conflict against Petros that remain unresolved as it is circa 30-40% lower than 2023 level.

• Energy transition to bolster offshore activities, in the long run. While oil is facing the threat of peak demand, we are sanguine that offshore activities will be bolstered by gas field development and carbon capture and storage (CCS) projects. Note that Petronas’ higher CAPEX target is also driven by allocation towards energy transition (ET) and decarbonisation effort which will make up c.20% of total CAPEX. Besides Kasawari CCS project, Petronas is also eyeing another 2 CSS projects in the pipeline namely Lang Lebah (Sarawak), and Bujang, Inas, Guling, Sepat and Tujoh (BIGST) fields (Peninsular Malaysia). While these projects may only begin in 2026F onwards, we are positive that this will improve the earnings visibility of upstream services contractors in the long run.

• Rising cost and geopolitics pose the major challenges. Of late, there are some oil and gas companies that are reviewing the feasibility of projects amidst rising service cost. For instance, PTTEP has delayed Lang Lebah development project as commercial bids that it received are higher than initial estimate. It is hoped that the delay in project sanction will cool off the service rate and ensure a more sustainable projects in the pipeline. Besides that, the disruption that arises from the Petros issue will need to be resolved as well.

• The outlook for downstream players remains to be challenging. The outlook for petrochemical players remain to be challenging as it is affected by overcapacity issue. The price of petrochemical products have been underperforming oil price since 2022 (Chart 3), leading to weak margin spread. Against this backdrop, we do not discount the possibility of asset impairment in upcoming 4Q24 result. LC Titan recently announced the closure one of its naphtha crackers in Pasir Gudang to limit its losses. Such rationalization of capacity is expected to get wider as the sector grapples with overcapacity while demand growth is sluggish. 

• Maintain OVERWEIGHT on Oil and Gas sector. We favor Upstream players premised on sustained CAPEX spending amidst stable oil price. Our top picks are, MISC (TP: RM10.30), MMHE (TP: RM0.94) and Hibiscus (TP: RM3.40). We see MISC as a proxy to oil major’s CAPEX spending for the FPSO development project particularly in frontier oil and gas market such as Brazil, Guyana, Suriname, and Angola. Meanwhile, MMHE will continue to benefit from local development projects. Notably, both companies are reducing its exposure towards oil market by venturing into emerging RE/decarbonisation business. We also favor Hibiscus as we see it emerging as a capable regional E&P player following a diverse asset portfolio in Malaysia, Vietnam and Brunei.

Source: BIMB Securities Research - 2 Jan 2025