• Maintain OVERWEIGHT; Top Picks: Bumi Armada, Dayang Enterprise (DEHB) and Yinson. We saw a general reduction in activity guidance in the latest Petronas Activity Outlook (PAO) 2025-2027 - which is not surprising, given the scaleback in spending. The overall operating environment could be less rosy but we continue to advocate selective stock selection, with FPSO and maintenance-related players being our preferred choices amidst attractive valuations.
• PAO 2025-2027 is largely within our expectations. The general reduction in upstream activities is premised on the slowdown in spending by Petronas. Drilling activities will be scaled down sizeably this year while overall offshore support demand is also likely to decline (-9% YoY) as a result of that. We anticipate project delays for offshore fabrication, pipeline installation and decommissioning, with a more prominent uptick in activities starting from 2026 onwards.
• Maintenance space still the resilient spot. Oil prices are projected to stay at USD70-80/bbl in the long term, and the national oil major remains committed to sustaining Malaysia's production target of 2mboepd (from 1.7mboepd in 2024). Petronas has also guided for an average of 367 facility improvement projects (FIPs) pa (vs the guided 300 FIPS pa last year) to be carried out in the next three years. We continue to favour the maintenance space, which should feel the least impact from the spending scaleback, given the importance of maintaining production levels for operating cash flow generation purposes. Sub-segments with higher activities in 2025 are hook-up & commissioning (HUC), and maintenance, construction & modification (MCM), decommissioning, as well as plant turnaround. As such, MCM-HUC winners such as DEHB, Petra Energy (PENB MK, NR), T7 Global (T7G MK, NR), Deleum (DLUM MK, NR) and Carimin Petroleum (CARIP MK, NR) are likely to see resilient work orders, while Dialog should benefit from an increase in plant turnaround activities.
• We believe the release of the long-awaited PAO 2025-2027 will provide more clarity for the market, on the domestic activities over the next three years. This should further anchor Prime Minister Dato' Seri Anwar Ibrahim's statement that the issue of the gas distribution rights in Sarawak between Petronas and Petroleum Sarawak (Petros) has been sorted out. Bursa Malaysia Energy Index or BMEI is currently trading at -1SD from its 5-year P/E and P/BV mean levels. We believe the lower oil price environment has been factored in, as Brent crude prices are now close to the 5-year mean of USD75/bbl, and above its 10-year mean of USD66/bbl. We maintain our oil price estimates for 2025-2027F at USD75/bbl.
• Downside risks to our outlook: Weaker-than-expected oil prices, high-than-expected operating costs, and contract cancellations.

Source: RHB Research - 31 Jan 2025