Geopolitics dominates Brent in 1H2024 though with limited exposure. Brent crude oil price started the year trading at USD76/bbl before slowly climbing up to the peak USD90/bbl as the Israel-Hamas conflict escalated. At a certain point, Brent crude was poised to climb above USD100/bbl as the war extended with Iran’s involvement following attacks on its embassy. Although Iran’s oil export has been in the US sanction list since 2019, its position as 4th largest OPEC+ member (producing about 3.2MMbbl/d) would cause a significant global supply shock as majority of its oil has been exported to China. Tensions quickly tapered off however with Iran’s dismissal of a retaliation, hence, preventing an all-out war between Iran-Israel and capping Brent crude prices at USD90/bbl. Overall, geopolitical tensions’ influence over oil prices have so far remained contained, so as long as oil-producing countries are not directly involved.

OPEC’s decision driven by interest rates, not outlook. OPEC+ members recently decided to continue its production cuts until end 2025 and gradually unwind its 2.2 MMbbl/d voluntary cut from October 2024 until September 2025. The Saudi Energy Minister validated the decision by saying they are waiting for interest rates to drop, with a better economic growth trajectory. The decision is on a slightly negative bias as the market is sceptical on oil demand absorbing the unwinding of the voluntary cut. Nevertheless, the decision contradicts its outlook report published in May 2024 which stated that global oil remains in deficit at about 2.2 MMbbl/d in 2H2024 and will continue to be in deficit by 2.3 MMbbl/d in 2025. By virtue of the outlook, the OPEC+ decision to unwind its voluntary cut will be faster than the current pace. This suggests the upcoming decision by OPEC+ would be much more reliant on how central banks manage interest rates to stimulate economic growth, and market reaction on oil price.

US production sustained at above 13.0 MMbbl/d over the last 9 months, despite the number of active rigs declining since the peak in November 2022. Technological advances have allowed horizontal drilling to reach the reservoir and increase the rigs’ production efficiency. US EIA expects US crude oil production to grow by 4% to 13.7MMbbl/d due to improved new well productivity, mostly in Texas.

US continues to replenish Strategic Petroleum Reserve (SPR). Since the largest historical drawdown of 207 MMbbl in 2022, the US has gradually replenished its SPR, taking opportunity of high US crude production rate and moderation in prices. We expect this trend will continue until it reaches preRussia invasion of Ukraine at around 500 MMbbl. This would reinforce support for oil prices at USD80/bbl level.

PETRONAS domestic capex on growth trajectory. PETRONAS’s recent results showed lower net profit on a YoY basis by 10.4% due to lower sales volume and higher production cost. However, this has not stopped PETRONAS from accelerating its overall capital expenditure (capex) by 2% YoY, with domestic projects seen increasing by 19.7% YoY to RM5.5bn. Most of this has been channelled to the Nearshore Floating LNG Project in Sabah and Kasawari CO2 Sequestration Facilities in Sarawak. Observing past trends, PETRONAS usually backloads its capex into the 2H of the year. We expect total domestic capex for 2024 to be higher than 2023, assuming continuous momentum from 1Q2024.

NEUTRAL outlook, with Brent trading sideways at between USD80-90/bbl. Global oil demand remains lacklustre, lacking evidence in the ability to sustain above USD90/bbl. Geopolitical risks may cause Brent crude to trade above USD90/bbl however, though also likely to be limited as no direct involvement of oil-producing countries may not cause global supply shocks. If there is, OPEC+ is likely to unwind its production cut faster than the current pace with high spare production capacity likely to be able to fill in potential voids in the market. For now, OPEC+ remains cautious on unwinding its production cut despite its deficit outlook, preferring instead to wait on central banks to cut interest rates. In the meantime, the US continues to replenish its SPR, supporting oil prices at above USD80/bbl.

As Brent crude price remains stable, we expect PETRONAS to accelerate its capex plan and is unlikely to roll-back any projects soon despite reducing its operating cashflow due to lower volume and higher production cost. However, PETRONAS may further refine its operational efficiency to maintain its cashflow amid increasing cost. On this note, awarding long-term contracts to oil and gas service and equipment (OGSE) and offshore support vessel (OSV) would allow PETRONAS to generate savings by locking rates of the services and assets at lower rates as compared to spot rates. This would also encourage industry players to increase capacities by leveraging on the the bankability and funding of these long-term contracts in their orderbook.

Among our coverage, we favor Dayang Enterprise. It recently secured the Asset Integrity Findings (AIF) contract for 3 years with an estimated value of around RM1.2bn. We expect the new maintenance, construction, and modification (MCM) and hook-up and commissioning (HUC) contracts with new rates to be awarded in 2H2024 for a 5-year period including extensions, which Dayang is a frontrunner for. We also expect its subsidiary, Perdana Petroleum to have a slice of Project Safina 2 to build new vessels on the back of up to 10-year charter contracts.

We also like Uzma as it recently secured a second water injection facility (WIF) contract in February 2024 for 5 years, which we expect to commence contributions from FYE6/26 onwards. On another note, its large scale solar 4 (LSS4) project in Kuala Kedah is expected to achieve Commercial Operations Date (COD) in July 2024 and will see earnings contribution immediately.

Source: PublicInvest Research - 26 Jun 2024