Going into 2022, global oil demand is expected to revert back to pre-pandemic levels at ~100m bpd. While renewed concerns on Covid-19 variants remain the largest uncertainty to the oil demand projection, our base-case is that impact from the recent Omicron variant should be mild and short lived. Nonetheless, we expect production growth from OPEC+ and U.S. tight oil could mildly outpace slowing growth in oil consumptions, with OPEC+ seeking to gradually ease production cuts and reintroduce supplies into the market. We maintain our 2022 average Brent crude price assumption of USD65 per barrel. While possibilities of significant upsides to crude oil prices could be low, our view is that as long as oil prices can hold firmly above the USD60/barrel-mark, current projections of investments and activity levels should not be significantly derailed. That said, 2022 is expected to be a year of recovery in terms of activity levels and investment spending – both globally and locally. Global E&P spending could see a rise in 2022, given the levels of under-investments over the past 1-2 years, while Petronas is expected to spend RM40-45b per year for the next five years in capex – of which upstream should still remain as the largest area of investment. Sector valuation is also at a discount, and has yet to recover, despite the strength in oil prices in recent months. We maintain OVERWEIGHT on the sector, with top picks this quarter being more defensive minded: DIALOG (OP, TP: RM3.50) and MISC (OP, TP: RM8.05).

Oil demand to revert back to pre-pandemic levels in 2022. Global oil demand and supply are expected to stabilise at >100m barrels per day (bpd) in 2022 - close to pre-pandemic levels (as a comparison, oil demand was at its lowest at ~80m bpd in the middle of the pandemic in April 2020). Nonetheless, while aggressive stock draws over the past couple of months had helped lifted oil prices - going into 2022, we expect that growth in production from OPEC+, U.S. tight oil, and from other non-OPEC countries will outpace slowing growth in global oil consumptions, especially in light of renewed concerns about Covid-19 variants. OPEC+’s spare capacity is at its peak in 2020-2021, and as these spare capacities gradually return into the market - in tandem with the coalition’s easing of production cuts, we believe these factors could limit significant upsides to current oil prices. We maintain our 2022 average Brent crude price assumption of USD65 per barrel - which we opine is considerably conservative, especially against EIA’s projection of USD70/barrel and Bloomberg consensus of USD72/barrel. Further Covid-19 impact remains as the largest uncertainty towards the recovery of global oil consumption, especially given the recent emergence of the Omicron variant, but nonetheless, as vaccination rates increase coupled with improved Covid-19 management, our base-case is that impact from the Omicron variant should be mild and short-lived.

Anticipating improved activity levels, in line with an economic reopening theme. Globally, 2022 is expected to see a surge in offshore exploration and production (E&P) capex, somewhat compensating for the levels of under-investments seen throughout the last 1-2 years. Of similar note, FPSO bidding opportunities will also see a comparable boost, with job opportunities emerging from Latin America, Asia Pacific and Africa. As most of the major FPSO players are already quite occupied with jobs at hand, we have seen an increasing number of tenders attracting only limited bidders or even being single-sourced – thus making it more of an operator’s market. Locally, oil and gas services and equipment (OGSE) providers had faced widespread difficulties in fulfilling jobs over the past 1-2 years due to logistical disruptions caused by the lockdown measures. This has led to numerous project delays, with job flows staying weak throughout this period. However, in tandem with the economic reopening, we believe activity levels are currently at an inflection point, with 2022 poised as the year of recovery. Petronas will be looking to spend ~RM40-45 per year in capex for the next five years – a welcomed and remarkable recovery from its low of RM33m in 2020. We expect upstream spending to remain as the group’s largest area of capex, despite increasing pressures of renewable energy adoption.

KL Energy Index still trading at a discount. Since the start of 2020, the KL Energy Index has been the worst performing sector in Bursa Malaysia, far ahead of Construction at a distant second. YTD, the sector is the second-worst, behind only to the healthcare (which predominantly consists of the rubber glove counters). As such, the sector is now currently trading at a 1SD discount from its mean valuations – similar to valuations trading at 1H 2020 during the peak of the lockdowns. In fact, throughout most of 2021, the index has been trading at a divergence away from the recovery in crude oil prices, which we believe could give rise to potential bargain-hunting opportunities.

Maintain OVERWEIGHT on the sector. Given the current valuations of the sector, coupled with an overall recovery theme for activity levels going into 2022, we believe there still could be some bargain-hunting opportunities in the sector, although keen investors should still be selective in their selection given the sector’s ever-deteriorating fundamentals. Despite limitations on the upside of crude oil prices, we believe that as long as oil prices can hold firmly beyond the USD60/barrel-mark, current projections of spending and activities should not be drastically derailed. For stock picks this quarter, we have chosen to go more defensive with our selection, with top picks such as: DIALOG (OP, TP: RM3.50) and MISC (OP, TP: RM8.05).

Source: Kenanga Research - 28 Dec 2021