We maintain NEUTRAL on the oil & gas (O&G) sector as softer brent crude oil price environment and uncertainties over domestic capex are likely to weigh on sector valuations in 2025. Meanwhile, earnings growth is expected to moderate after a year of easy comps. We turn more selective by opting for a thematic approach and highlight the following plays: (a) new tender cycle for floating, production storage and offloading (FPSO) vessels; and (b) fleet expansion for the offshore support vessel (OSV) subsegment amidst a looming age cliff. We favour players with sustainable earnings, a strong balance sheet and appealing valuations, particularly after the recent selldown. Our top picks are MISC, Keyfield International and Deleum.

• Uncertain sectoral narrative to weigh on valuations. We have a NEUTRAL call on O&G. We think the sector will continue to struggle in attracting investors due to macro-level downside risks. Brent crude oil prices are expected to soften in 2025 due to the return of OPEC's spare capacity after cutting production over the past few years. With the initiative falling flat and member countries seeing loss of market share, we struggle to find reason why the cuts should continue, particularly as major member Saudi Arabia is said to prefer stable prices in effort to pursue downstream opportunities. Closer to home, Petronas has expressed concerns over future earnings after the take-over of the sole gas aggregator role by Petro Sarawak to support plans for the Sarawak Gas Roadmap. These factors have led to the sell-down in recent months with % of tracked asset under management for the sector now close to its 2022 lows of 3.1%, according to our fund manager radar.
• We turn selective and focus on thematic plays for 2025. Amidst the uncertainties, we prefer players with a stable earnings profile and strong balance sheet. However, to avoid being caught in a value trap, we believe investors ought to take a thematic approach to identify key catalysts. We highlight 2 themes:
  • Theme 1: New FPSO tender cycle. Despite a lower brent crude price assumption of US$75-USD80/bbl for 2025, we believe upstream capex spend will continue globally but national oil companies and oil majors will turn more selective. We see focus on deepwater field which will require investments into FPSO units which are the preferred mode for production and storage in harsh and deep conditions. We see multiple tenders up for grabs in Brazil, West Africa and Malaysia as conversion players return to the market after freeing up capacity after the delivery of prior projects.
  • Theme 2: Fleet expansion for OSV. We believe the subsegment will be relatively more defensive against other OGSE functions as charter rates will hold at current levels as the supply deficit situation remains status quo for now. We think there is downside risk to supply as most vessels are inching closer to the maximum age for operations. Players will be forced to choose between refurbishing or renewing their vessels. In contrast, we see alpha plays relative to the situation from players with a younger fleet, a stronger net cash position and ready financing facilities who will be able to look at expanding their fleet size.

Source: AmInvest Research - 6 Dec 2024