We are slightly positive on this Petronas Activity Outlook 2022-2024 report as most of the value chains are expected to see improved activity levels in 2022 from 2021 – which we think would be sufficient to help the local OGSE sector recover in 2022. We expect Petronas capex spending to be maintained at the RM40-45bn level annually over the next 5 years (2022-2027), with progressive increase in allocation towards renewable energy initiatives. We maintain our Brent crude oil price forecast at USD70-75 per barrel for 2022. Maintain OVERWEIGHT on the Oil & Gas sector with Bumi Armada (BUY; TP: RM0.84) and Dialog (BUY; TP: RM3.38) as our top picks.

Below Are the Key Takeaways From the Petronas Activity Outlook 2022-2024 Report.

Rig. Petronas expects an average of 22 rigs to be chartered in 2022 (9 Jack-up rigs, 4 Tender rigs, 6 Hydraulic Workover Units, 3 semi-sub/drillships) as compared to 16 rigs (9 jack-up rigs, 3 tender rigs, 3 Hydraulic workover units, 1 semi-sub/drillships) in 2021. Petronas has indicated that the subsurface activity outlook is expected to be positive for the next 3 years (2022-2024) given the oil price recovery with the relaxation of pandemic restrictions and the increase of plug and abandonment (P&A).

OSV. The outlook for OSVs are expected to be slightly better in 2022 as there are a total of 336 support vessels (Production: 138, Drilling: 198) expected to be chartered throughout the year as compared to 289 support vessels (Production: 151, Drilling: 138) in 2021. Petronas has guided that there will be consistent demand for vessels supporting production operation over the next 3 years. However, requirements for vessels supporting drilling is expected to decline in 2023-2024 in view of potential vessel optimisation across drilling projects.

HUC, MCM and plant turnaround. Higher HUC and MCM man-hours are expected for 2022 (HUC: 6.3, MCM: 11.5) as compared to 2021 (HUC: 4.7, MCM: 8.5). A slightly better year for plant turnaround activities are expected in 2022 (11 man-hour units) as compared to 2021 (10 hour man-hour units) as one turnaround was deferred to 2022.

WHP, CPP and offshore fabrication. Fixed structures fabrication is expected to be slightly lower in 2022 (5 WHP, 0 CPP) as compared to 2021 (5 WHP, 1 CPP) while offshore installation application works are expected to be slightly lower in 2022 (11 lifts vs 12 lifts in 2021).

Winners. We highlight a few key value chains that stood out as clear winners throughout the Petronas Activity Outlook 2022-2024 report such as the HUC, MCM and OSV segments – which we believe will benefit Perdana Petroleum, Dayang and Carimin.

Losers. We see losers to be value chains exposed to wellhead platform (WHP) and Central Processing Platform (CPP) – which will impact the job flows for Sapura Energy and MMHE.

Overall. We are slightly positive on this Petronas Activity Outlook report as most of the value chains are expected to see improved activity levels in 2022 from 2021 – which we think would be sufficient to help the local OGSE sector recover in 2022.

Petronas capex and sector outlook. We expect Petronas capex spending to be maintained at the RM40-45bn level annually over the next 5 years (2022-2027), with about 9% (RM3.6-4.1bn) of its annual capex allocated to new energy initiatives. Petronas has pledged to a net-zero carbon emission goal by 2050, but still believes that oil and gas would still form 50% of the world’s energy mix for the next 20 to 30 years. Petronas also aims to increase domestic spending to 55% of capex (RM22- 25bn) and the remaining would be for international programmes. We think that indicated capex levels should still be sufficient to help the sector recover in 2022, albeit still lower than its pre-pandemic 2018-2019 levels.

Oil price forecast. We maintain our Brent crude oil forecast at USD70-75 per barrel for 2022 (YTD2021: USD75) as we believe that OPEC+ is committed to provide a good equilibrium for oil prices. We view that the oversupply in 1H22 will be mitigated (though not fully) by the increasing demand of O&G products from the reopening of economies globally, coupled with OPEC+’s program to gradually increase oil production by 400k bpd monthly and to fully phase-out cuts by Sept 2022, would bolster a stable oil price in the range of USD70-75 per barrel.

Maintain OVERWEIGHT. Our top picks for the sector are Bumi Armada (BUY; TP: RM0.84) given its foothold in the FPSO business which provides steady recurring income, coupled with speedy enhancement in its debt profile; and Dialog (BUY; TP: RM3.38) for its recurring income type of business model and we deem it as one of the only listed secular growth stock in the local oil and gas space.

Source: Hong Leong Investment Bank Research - 29 Dec 2021