Tight oil market may be easing in 2022, but risk remains on the upside
With greater vaccination rate and more reopening of international borders, we expect oil demand to recover to pre-covid level possibly by 2H22. Despite oil market expected to remain tight in 1Q22, we believe it will gradually ease thereon as OPEC+ add more supply to the market. This will also be supported by higher supply from US shale and other non-OPEC countries. As such, we forecast benchmark Brent oil price to average in the range of USD70-75/bbl in 2022.
Upcycle in offshore investment remains
The emergence of new Covid-19 variants has delayed an immediate shift towards normalcy. This has affected some offshore projects in 2021 particularly wells abandonment and offshore maintenance. Notwithstanding, the outlook for offshore projects remains constructive. This is evident from Petronas Activity Outlook (PAO 2022-2024) which showed an uptick in the number of field development projects in the pipeline. We believe this will provide significant catalyst to boost the earnings and valuation of both offshore fabricators and drilling rig operators.
MMHE and Velesto remains a good BUY
Under our coverage, we think both MMHE (BUY, TP: RM0.65) and Velesto (BUY, TP: RM0.28) will continue to benefit from the upcycle in offshore projects. Based on PAO, it is expected that there will be at least 1 project each year over 2022-2024 that requires fabrication of large WHP/CPP. However, as Sapura Energy is currently facing financial difficulties, this left MMHE as the sole contractor capable to undertake such projects. Meanwhile, Velesto’s jack-up rigs could achieve full utilisation as local demand is expected to peak in 2024 with 16 rigs (2021: 9 rigs).
Remain Overweight on the sector
We maintain our Overweight recommendation on Oil and Gas sector premised on the uptick in activities following higher oil prices. Our top pick is Hibiscus (BUY, TP: RM1.20) as we see it as the main beneficiary of foreign PSC exiting the country, hence potentially transforming it into a prominent oilfield operator in Malaysia.
Source: BIMB Securities Research - 6 Jan 2022
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Created by kltrader | Apr 01, 2024