A read-through of Petronas’ Activity Outlook for 2021-2023 returns a rather underwhelming outlook. Most of the value chains are expected to see largely flattish or lower activity levels in 2021, as compared to 2020, amidst Petronas’ increased prudence in spending. Ultimately, we believe this downplays any possibility of a rapid recovery towards pre-pandemic activity levels in the coming year, and further confirms our view that the recovery trajectory will be slow and gradual. While no sub-sector emerged as clear winners going into 2021, we see brownfield services providers (e.g. UZMA) to benefit from the increased activity levels across various value chains – e.g. increased HWU demand, wells decommissioning and services. Plant turnaround providers (e.g. DIALOG, SERBADK) are also expected to see higher number of turnarounds in 2021 from 2020. Meanwhile, lower greenfield activities may see limited opportunities for fabricators (e.g. MHB, SAPNRG), HUC providers (e.g. DAYANG), piperelated players (e.g. WASEONG, PANTECH), and jack-up rigs provider (e.g. VELESTO). Petronas also placed a huge emphasis on the rise of renewable energy, being the fastest growing source of energy in the world, and has encouraged (oil and gas services and equipment providers (OGSE) providers to venture into providing solutions in the renewable energy sector in efforts to future-proof their portfolios to remain relevant. Names within our coverage that already have exposures in the renewable energy segment include SAPNRG, SERBADK, UZMA, WASEONG, and YINSON. Maintain NEUTRAL on the sector, as fundamentals largely remain weak. Our top trading pick is UZMA (OP, TP: RM0.72), while SERBADK (OP, TP: RM2.50) and DIALOG (OP, TP: RM4.35) remain our fundamentally-driven picks.

Great reset into a new normal. Petronas had just released its Activity Outlook report for 2021-2023 last week. In it, the oil major cited the challenges faced in 2020 (i.e. plunge in oil prices, widespread Covid-19 pandemic), bringing the industry into what is now regarded as a “new normal”. Petronas had also termed this as a “great reset” of the industry, as companies seek to adapt and increase their resilience to remain relevant under a challenging oil outlook on top of the acceleration of the energy transition.

Activity outlook by value chains. Given the challenges faced in 2020, most of the value chains saw a huge slash in actual activity levels versus what was planned during the start of the year. Going into 2021, the followings are the activity outlook for some of the more notable value chains: Drilling rigs: Total drilling demand is expec

Drilling rigs: Total drilling demand is expected to be at 22 rigs for 2021 (from 14 in 2H20). The rise in demand mainly comes from hydraulic workover units (HWU) to 5 rigs in 2021 (from only 1 rig in 2H20). This will mostly benefit HWU players e.g. UZMA. Meanwhile, jack-up rig demand is largely expected to remain weak at 10 rigs, up only 1 rig from 9 in 2H20. This means that jack-up rig providers e.g. VELESTO are largely expected to see flattish utilisation rates going into 2021.

Offshore fabrication: The number of new offshore structures are expected to be even lower moving forward, at 7 structures in 2021, and only 1 in 2022 (based on Petronas’ base case scenario) – versus 8 structures in 2020 (planned was at 11). This may translate to lower job opportunities for fabricators e.g. MHB, SAPNRG.

Hook-up and commissioning (HUC): 2021 is expected to be lower at 3.5m man-hours, versus 4.4m in 2020. We expect this to translate to lower number of jobs for players e.g. DAYANG, CARIMIN.

Decommissioning: Wells decommissioning is expected to rise modestly to 18 wells in 2021, from 15 in 2020. This would benefit players e.g. UZMA. Supply of line pipes: Huge drop-off t

Supply of line pipes: Huge drop-off to 41km in 2021, from 79km in 2020. This means lower opportunities for pipe-related players e.g. WASEONG, PANTECH.

Offshore maintenance, construction and modification (MCM): 2021 is expected to be slightly lower at 10.1m man-hours, versus 11.2m in 2020. We expect this to translate to marginally lower work orders called for players e.g. DAYANG, CARIMIN.

Plant turnaround: 2021 is expected to see higher number of turnarounds at 11, versus 7 in 2020. This would benefit players e.g. DIALOG, SERBADK.

Offshore support vessels: Demand for vessels is expected to be slightly higher in 2021 at 303 vessels, versus 279 in 2020. The rise in demand is mainly coinciding with the increased demand for drilling rigs. This will impact players e.g. ALAM, PERDANA, ICON.

Source: Kenanga Research - 4 Jan 2021