Petronas has just released its activity outlook report for 2022-2024. Overall, the group underlines a cautiously optimistic tone, with the recovery still fragile given the uncertainties in the oil market. From our read-through, we find 2022 activity outlook to be somewhat mixed – while some value chains are expected to see improved activity levels from 2021, most are likely to remain flattish. On balance, while no particularly strong winners emerged, we highlight HUC and MCM (e.g. DAYANG) players as partial winners given the expected increase in work orders. Conversely, VELESTO may continue to struggle to achieve breakeven utilisation unless its overseas bids materialise, with demand for jack-up rigs continuing to remain low. Fabricators (e.g. SAPNRG, MHB) could also see slower job opportunities locally. We still expect Petronas to spend RM40-45b capex per year for the next five years, given the slow 2020-2021, with upstream still being the largest area of investment, with cost optimisation remaining the key focus. Nonetheless, we maintain OVERWEIGHT on the sector, given the discounted valuations especially on selective big caps. We opt to go defensive on our stock picks this quarter, and have selected DIALOG (OP, TP: RM3.50) and MISC (OP, TP: RM8.05).

Recovery while on track, still remains fragile. In Petronas Activity Outlook 2022-2024, the national oil company underlines a cautiously optimistic tone. While a recovery is underway, underpinned by relaxation of movement restrictions, the group also highlighted that the recovery outlook could be fragile and uncertain as the oil market adjusts to both short and long-term landscapes. Accelerated agenda for energy transition will pose further challenges to the oil market, and hence, Petronas also emphasized its point on remaining cost-competitive to ensure projects remaining feasible under uncertainties.

Activity levels remained mixed. Going into 2022, we feel that the activity level outlook from Petronas is rather mixed. While some sub-segments are expected to see improved activities as compared to 2021, others are expected see flattish activities or just marginal bump ups. That said, as compared to last year’s activity outlook report, Petronas had raised its 2022 activity forecasts for most of the sub-segments – although this could just be a reflection of the delayed jobs in 2021, as most sub-segments saw actual activities failing to meet last year’s forecasts.

Activity outlook for several notable value chains are as follows:

• Drilling rigs. Total number of drilling rigs is expected to rise to 22 in 2022 – up from 2021 actual of 16 and also increased from last year’s forecast of 18. That said, this could be a reflection of delayed jobs in 2021, as it failed to meet the initial planned target of 22 rigs. More specifically, demand for jack-up rigs (JUR) is expected to stay flat in 2022, versus 2021, at 9 – signalling continued struggles for VELESTO unless the group successfully secures contracts regionally.
• Offshore fixed structures fabrication. 2022 will see a decrease to 5 structures, from 6 in 2021. This could translate to continued limited opportunities for local fabricators such as SAPNRG, and MHB.
• Hook-up and commissioning (HUC). Expected to see a strong 2022, with number of man-hours to rise to 6.3m (base case) from 4.7m in 2021. This will benefit players such as DAYANG, SAPNRG, PETRA, and CARIMIN.
• Decommissioning. Wells decommissioning work is expected to see huge increase in the coming three years. This may benefit players such as UZMA.
• Offshore maintenance, construction and modification (MCM). Expected to see a modest improvement in 2022, from 2021 level at 11.5m man-hours versus 8.5m. This would benefit players such as DAYANG, SAPNRG, PETRA, and CARIMIN.
• Plant turnaround. 2022 levels largely remaining flat versus 2021. As such, players in this space (e.g. DIALOG, SERBADK, and MHB) should expect to see stable work orders.
• Supporting vessels. 2022 largely flattish from 2021 levels. OSV players in this space include ALAM, ICON, and PERDANA.

No particular strong winners. While no particularly strong winners emerged from this round of activity outlooks, we do highlight HUC and MCM players as partial winners given the expected increase in work orders going into 2022. Meanwhile, UZMA may also benefit from the increased well decommissioning opportunities. Conversely, we highlight VELESTO to be a partial loser. With JUR demand continuing to remain sluggish, we believe the group could still struggle to achieve breakeven utilisation, except with the successful materialisation of its overseas tenders. Fabricators (e.g. SAPNRG, MHB) may also be partial losers, given the lower number of jobs available locally.

Petronas still prudent in capex spending. Petronas is expected to spend capex of RM40-45b per year for the next five years. While this is a welcomed improvement from 2020 level of RM33.4b (and YTD-9M21 of RM20.4b), this would still be below pre-pandemic levels (e.g. 2018-2019 capex levels at ~RM47-48b), and reflecting Petronas’ continued prudence in its capex spending. While pressure for the adoption of renewable energy is ever increasing, we still believe that upstream would remain as the group’s largest area of investment.

Maintain OVERWEIGHT on the sector. Despite the increased prudence and cautiousness in the sector adapting to a post-pandemic era, current sector valuations are still trading at a discount, especially for selective big-caps. The KL Energy Index is currently still trading at a 1SD below its mean valuation, and has been trading at a divergence away from the strength in crude oil prices in recent months. That said, given the ever-deteriorating fundamentals, we believe keen investors should still be selective in their picks. For stock picks this quarter, we have opted to go more defensive with our selection with: DIALOG (OP, TP: RM3.50) and MISC (OP, TP: RM8.05).

Source: Kenanga Research - 29 Dec 2021