• We expect oil price to move higher in 2H23 on the back of potential inventories reduction due to OPEC+ production cut. This will continue to be supportive to planned development projects.

• Against this backdrop, we prefer companies that has direct exposure to oil prices as well as those that provide services to development projects.

• Maintain an OVERWEIGHT recommendation on Oil and Gas sector. Our top picks are MISC (TP: RM8.10), MMHE (TP: RM0.94), Velesto (TP: RM0.30) and Hibiscus (TP: RM1.30).

Lower oil price in 1H23. Oil price was significantly lower in 1H23 as compared to the same period last year mainly due to demand concern amidst rising inflationary environment and moderation in global growth. Brent crude was traded at USD80.3/bbl YTD (average), 23% lower than USD104.5/bbl last year.

...but set to improve on OPEC+ production cut. Nevertheless, we think the bulls will recover its lost ground in 2H23 mainly driven by substantial inventories draw due to OPEC+ production cut. Recall that it already had in place a production cut of 3.66mn bpd for 2023. Recently, Saudi announced that it will make a voluntary cut by 1mn bpd in July to 9mn bpd in order to reach the said target. It is worth noting that the rising US oil inventories in 1Q23 has recently slowed down to the 5-year average level (Chart 3). Besides that, the rising number of US oil rigs has peaked in November 2022 and it has reversed on the lagging impact of lower oil price, as expected (Chart 1). Consequently, this has aggravated the decline in number of drilled but uncompleted (DUC) wells which has further dropped by c.5.3% or 270 wells YTD to 4,834 wells as of May 2023 (Chart 2). All in all, we think this is a precursor to weaker production from the US in 2H23, further reducing the US inventories. Taking into account all factors, we maintain our oil price projection for 2023 at USD90-100/bbl.

Expect a steady number of new project sanction. We opine the outlook for offshore projects remain constructive as long as oil price remains above USD60-70/bbl. Our channel check also indicates that planned development projects are still viable at that oil price level despite higher drilling cost. Note that the daily charter rate for jack-up rigs has risen back to above USD100k/day. Hence, our expectation for a multi-year upcycle in offshore development project remains.

MMHE and T7 Global are the beneficiaries. Against this backdrop, we prefer companies which stand to benefit from rising development project. MMHE is Malaysia’s largest contractor for construction of offshore fixed platform whereas T7 Global is the service provider for floating production asset.

Bullish view on offshore assets. Asset prices and charter rates for offshore assets including rigs and petroleum tanker is on the uptrend thanks to the revival in offshore development activities. We are bullish on offshore assets provider such as Velesto and MISC given lack of new supplies coming into the market. This is attributable to (i) lack of access to financing due to ESG concern, (ii) higher funding cost amidst elevated interest rate environment, and (iii) rising regulatory requirement on carbon emission.

Maintain OVERWEIGHT. We maintain an OVERWEIGHT stance on the Oil and Gas sector particularly in the upstream services companies premised on the uptick in oil and gas offshore capex spending. Currently, our top picks are MISC (TP: RM8.10), Hibiscus (TP: RM1.30), MMHE (TP: RM0.94), and Velesto Energy (TP: RM0.30). We also have a BUY call on Sapura Energy (TP: RM0.08), DNeX (TP: RM0.73), Dayang (TP: RM1.78), RL (TP: RM0.36), and LC Titan (RM1.56).

Source: BIMB Securities Research - 14 Jul 2023