• Petronas guided to increase local capex to RM22-25bn, 26-44% higher as compared to 2020 – which is a positive

• Raising 2021 Brent oil price forecast to US$60-65/bbl (from US$45-50) as OPEC+ has been diligent in curtailing output. Price likely capped on the possibility of scaled-back production by Saudi in coming months

• We upgrade MMHE to Hold and Velesto to Buy, joining Petronas Dagangan, Dialog, Serba Dinamik, Bumi Armada and Gas Malaysia (all listed as Buys)

Recent Oil Price Rally Driven by Supply Constraint

The bad US winter storm, and additional 1mmbpd voluntary cut by Saudi Arabia took the market by surprise, resulting in the recent strong rebound in global oil prices. Oil demand is expected to remain fluid, with a projected 5.5mmbpd recovery in 2021, after falling by 9mmbpd in 2020. US production is one wild card that warrants a closer look. EIA is projecting a 0.2mmbpd US output decline in 2021, but foresees output increasing by 0.9mmbpd to 12mmbpd in 2022, close to its historical high of 13mmbpd in 2019, which may dampen price recovery.

Forecast Brent to Trade in the Range of US$60-65/bbl in 2021

We raise our 2021 Brent price forecast to US$60-65/bbl (from US$45-50/bbl). In the near term, we see a possible knee-jerk reaction to global oil prices in the event that OPEC+ cartels, particularly Saudi, decide to slowly unwind output outpacing the uncertain demand recovery. We now forecast longer-term Brent prices to be in the range of US$65-70/bbl. We remain cautious on the long-term oil price with a possible resurgence in US oil output.

See Upside in Announced Petronas Activity Outlook for 2021

Petronas has recently announced that it plans to spend RM40-45bn total capex in 2021, as compared to RM33.4bn in 2020. Malaysia’s allocated capex is budgeted to increase to RM22-25bn, representing a 26-44% increase as compared to 2020. This could possibly signal upside to Petronas’ Activity Outlook activities announced earlier in December 2020.

Upgrade MMHE to Hold, Velesto to Buy

We raise MMHE to a Hold (from Sell) with a higher TP of RM0.72 (from RM0.29) on the back of a more positive local capex outlook. We also raise Velesto to a Buy (from Sell) with a higher TP of RM0.24 (from RM0.13) as we expect it to benefit from higher capex, being the largest jack-up player in Malaysia. We believe any capex recovery will likely benefit maintenance players, and as such we reiterate our Buy ratings on Dialog and Serba Dinamik. We also have Buys on Bumi Armada, Gas Malaysia and Petronas Dagangan as our large-cap sector recovery pick. Maintain Neutral.

Source: Affin Hwang Research - 24 Mar 2021