Investment Highlights

• Energy transition hit a bump in 2022. There have been rising debates on how the energy crisis in 2022 resulted in a slower energy transition path, which can be arguably shown by the disappointing reduction of carbon emissions recorded in the last year. The oil and gas sector, in particular, was blamed as the culprit behind this underperformance due to the increased oil production and upstream exploration and production (E&P) investment in 2022. This is despite the push for decarbonisation efforts as the world strives to curb global warming.
  Conversely, the Paris-based International Energy Agency’s (IEA) earlier research revealed that global energy-related CO2 emissions grew in 2022 by 0.9% YoY or 321mil tonnes to a historical-high level of 36.8 gigatonnes (Gt). The agency attributed the lack of decarbonisation progress made to a number of reasons including growing energy demand around the globe and increased consumption of coal for power generation amid elevated natural gas prices.

• Higher upstream oil and gas production signals further hurdles for net zero emission targets. Global oil & gas production is expected to continue growing against the backdrop of higher oil demand. This would dampen the world’s aspirations to achieve net zero carbon emissions by 2050. According to EIA, the world’s daily oil production had risen by 4.4% YoY to 99.9mil barrels of oil per day (mbopd) in 2022. The agency also projects daily production to increase by 1.5% YoY to 101.3 mbopd in 2023 and further 1.7% to 103 mbopd in 2024 – surpassing 2019 levels of 100.2 mbopd. Separately, the rise in oil production is also underpinned by higher upstream oil and gas investments as oil producers around the world reap the benefits of higher oil prices by increasing oil production.

• Comparison of emission targets among oil majors. Oil and gas companies have varying targets for energy transition, although the ultimate goal of reaching net zero carbon emission is generally shared by most. Among a number of selected oil majors assessed by us, we highlight that Shell and BP have set the most aggressive targets in terms of carbon reduction. Meanwhile, Chevron has the most opaque decarbonisation roadmap with a lack of detailed carbon reduction targets.
  Back home in Malaysia, Petronas also followed suit with oil majors’ footsteps and announced its aspiration to achieve Net Zero Carbon Emission by 2050 target. While Petronas’ carbon reduction targets pale in comparison when compared to the likes of BP and Shell, it still offers a great deal of clarity on how the company could navigate through the challenging decarbonisation journey.

• Oil majors put a brake on net zero targets. Notwithstanding ambitious targets set by oil and gas companies, we caution that several oil majors recently put a brake on their decarbonisation targets as they reaped record profits amid elevated oil prices. This can be shown by various decreases in emission reduction targets made by oil majors recently despite maintaining their net zero emission by 2050 aspirations.
  In addition, Norwegian consultancy firm Rystad Energy earlier said that oil majors have been aggressively divesting carbonintensive assets as the shortcut to quickly cut down direct emissions footprint. This does not bode well in terms of decarbonisation, as it will only result in the emissions being transferred from one company to another. Rystad Energy also pointed out various more effective measures to tackle direct emissions such as the adoption of carbon capture and storage, improvement in operational efficiency as well as portfolio optimisation. These incidents obviously do not bode well for energy transition and may dampen the long-term target to limit the increase in global temperature by 1.5 degrees by 2050.

• Renewable energy and electrification are gathering steam. On a positive note, the exponential growth in the renewable energy space over the past years had provided some relief. According to International Renewable Energy Agency (IRENA), the global renewable generation capacity grew by 295 GW or 9.6% YoY to 3,372 GW in 2022. It also highlighted that renewables accounted for an exceptional 83% of the total power capacity additions in 2022. Being touted as the primary alternative energy source for fossil fuels, the growth in renewable energy adoption will consequentially lead to a decline in the consumption of high carbon-emitting fossil fuel energy, propelling the net-zero transition pathway.
  In addition, electrification also plays a vital role in meeting energy transition goals. Essentially, electrifying the use of energy in various sectors (such as the transport and building sectors) with renewables would be a more effective way to reach decarbonisation goals while providing energy security and affordability. The latest edition of IEA’s Global Electric Vehicle Outlook estimated that more than 10mil electric cars were sold worldwide in 2022 and that sales are expected to grow by another 35% in 2023 to reach 14mil. This explosive sales growth pushed the total number of electric cars to 26mil in 2022, translating into a 14% market share in the overall car market (up from 4% in 2020). While projecting EV sales to continue to chart a growth spurt in the long term, the agency foresees the market share for electric cars to increase further to 18% in 2023.
• Bursa-listed oil and gas companies to play catch-up on energy transition. Among the public-listed oil and gas companies on Bursa Malaysia, we like Yinson for its top-notch commitment to the energy transition front. The group is committed to achieving its 30 most impactful ESG targets by 2030 (also known as “30 by 30 Targets”). This can be shown by the group’s aggressive expansions in the renewable energy and green technology space. Meanwhile, Petronas Gas is also playing a vital role in the energy transition given that natural gas is a cleaner fuel source with lower carbon footprint compared to petroleum. The group also adheres to a GHG emissions limit of 5mil tonnes of CO2 equivalents together with continuous emissions reduction efforts.
  Furthermore, we opine that MISC has the most transparent and detailed emissions plan when compared to other local oil and gas companies. The group aims to reduce its shipping operations’ scope 1+2 GHG intensity by 50% by 2030 compared to 2008 base year level. This will subsequently anchor its ultimate goal of accomplishing net-zero scope 1+2+3 GHG emissions by 2050. It is also exploring various opportunities in the low-carbon space such as the deployment of zero-emission vessels by 2030 and potential venture into CCS. We also highlight that other oil and gas companies under our coverage such as Dialog Group, Bumi Armada and Deleum are also committed to achieving net zero emissions by 2050, despite different interim targets and measures.
• Maintain OVERWEIGHT on the sector. Our top picks for the sector remain Dialog Group (BUY, FV: RM3.31) which is supported by resilient noncyclical tank terminal and maintenance-based operations. We also like Petronas Gas (BUY, FV: 19.39), which offers a decent dividend yield of 4.7% which may be raised further from an optimised capital structure and stable earnings.

• Potential de-rating factors include: (1) disrupted demand for oil amid the rising likelihood of a global economic downturn following aggressive rate hikes by major central banks; (2) slower domestic oil and gas contract flows; (3) potential rise in oil production due to fresh investments in the sector; and (4) continued derating of oil and gas companies valuations due to persistent ESG concerns.

Source: AmInvest Research - 14 Jul 2023