• Following strong revenue growth in 2023, we expect upstream players to record further improvement moving into 2024 benefitting from rising day rate and sustained asset utilization rate.

• We opine that the weakening of oil price in 2H23 was due to the strength in US oil production that could have offset OPEC production curtailment. Further upside to US production is limited, however.

• This, coupled with further production cut by OPEC+, would drive oil price higher in 2024. Our average Brent forecast for 2024 is USD85/bbl. Planned development projects will remain viable at this price level.

• 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: RM10.10), MMHE (TP: RM0.94), Velesto (TP: RM0.30) and Hibiscus (TP: RM3.40).

Uptick in offshore activities. Our thesis of new upcycle in offshore O&G activities were manifested through significant uptick in revenue generated by upstream services companies in 2023. MMHE, T7 Global and Velesto recorded an upsurge in revenue or by 78%, 72% and 153% YoY respectively for 9M23, driven by a combination of higher day rate and utilization rate of assets. Notably, O&G producers including Hibiscus and Ping Petroleum (DNeX’s subsidiary) are forging ahead with planned development projects underpinned by elevated O&G price. That was despite higher project cost which was evident from the rise in daily charter rate (DCR) for jack-up rigs which has almost doubled to USD100-150k/day.

Oil price outlook. We forecast benchmark Brent oil price to average at USD85/bbl in 2024. In 2023, it was traded lower than our expectation of USD90-100/bbl (2023 average: USD82/bbl), however. We think the underperformance was due to higher-than-expected US oil production that rose to a fresh high of 13.2mn bpd in October 2023 despite the falling number of rigs and drilled but uncompleted (DUC) wells (Chart 2). This has led the US oil inventories to return to 5-year average level (Chart 3). On average, US production rose by 619k bpd or 5% YoY to 12.5mn bpd in 2023 (2022: 11.9mn bpd). This is more than the realized OPEC production cut which declined by 533k bpd or 1.8% YoY to 28.5mn bpd (2022: 29mn bpd). Higher US production can be attributable to rising well productivity gain from drilling at most promising area. Nevertheless, we are affirmative that upside risk to US production is limited. EIA estimates US production to stand at 13.11mn bpd in 2024, similar to current production rate. In addition, we opine the recent consolidation in US shale players could jeopardize the production outlook due to reallocation of capital.

Upstream players are in more enviable position relative to downstream. We remain bullish on upstream services companies premised on the uptick in oil and gas offshore capex spending. Conversely, downstream petrochemical players such as PChem and Lotte Titan may continue to be affected by weak consumer sentiment amidst inflationary environment. While Petdag is benefitting from rising tourism activities (i.e. aviation fuel), potential subsidy rationalization plan by the government presents significant risk to sales volume

Maintain OVERWEIGHT. All in, we maintain an OVERWEIGHT stance on the Oil and Gas with MISC (TP: RM10.10), Hibiscus (TP: RM3.40), MMHE (TP: RM0.94), and Velesto Energy (TP: RM0.30) as our top pick. We believe the market will rerate these companies as earnings visibility are gaining traction.

Source: BIMB Securities Research - 15 Jan 2024