• Malaysia’s O&G sector still lacks near-term catalysts due to cautious capex spending and lackluster oil prices. Current sector valuations do not look appealing, considering the headwinds
• We see limited upside for Brent oil price in 2021, likely to trade range-bound between US$45-50/bbl, on potential lower supply cuts among OPEC+ and global demand recovering slower than expected
• Maintain a Neutral rating on the sector. Sector top picks include Dialog and Serba Dinamik. We also like Gas Malaysia for a yield play

Sharp fall in 2020 contract wins, cautious capex moving into 2021

The 33% year-to-date (ytd) decline in Brent oil prices resulted in a 61% slump in sector new contract wins in 2020. Excluding the lumpy FPSO, tankers and RM7.7bn contract awarded to Serba (deemed a one-off), normalized ytd contract value was down by 45% yoy. Global oil majors’ capex moving into 2021 is expected to decline for the second consecutive year, by 6% (2020: -24% yoy), suggesting a cautious view on global oil prices. Back home, a clearer outlook for 2021 would only be known after Petronas’ Activity Outlook report which tends to be released by end Dec-20.

Expect Brent to trade in the range of US$45-50/bbl in 2021

We believe the Brent oil price has limited upside from current levels, and expect it to trade within the range of US$45-50/bbl in 2021. While a Covid-19 vaccine is starting to roll out in different parts of the world, the recent development of a virus mutation could derail demand recovery. Risk of OPEC+ allies lowering their earlier intended production cuts could also put downside risk to current supply-demand dynamics projections.

Still lacking catalysts; Reiterate Neutral on sector

Given the limited upside to global oil prices and cautious capex spending, we do not see many catalysts for the sector. For sector exposure, we recommend BUYs on Dialog (TP: RM4.60) and Serba Dinamik (TP: RM2.15) for their good growth prospects, resilient earnings amid a low oil-price environment and good execution track record. We also have a BUY on Gas Malaysia (TP: RM3.05) for its dividend yield and backed by decent 4.4% EPS growth. Maintain Neutral rating on the sector.

Source: Affin Hwang Research - 29 Dec 2020