We are overall positive from our read-through of Petronas’ Activity Outlook for 2023−2025, and have identified no losers. Meanwhile, we see key beneficiaries to be drilling players (e.g. VELESTO, UZMA), as well as MCM and HUC providers (e.g. DAYANG). Petronas continues to be positive on its own outlook, and has also further reiterated its commitment towards energy transition. That said, we are expecting Petronas’ 2023 capex spending to stay at 2022 level, which is expected to come in at around RM60b for the full year (backloaded towards 4Q2022), with the oil and gas upstream segment remaining the largest area of investment. This is expected to sustain activity levels, and continue the recovery trend that we have seen throughout most of 2022. Given Petronas’ strong net cash position, we see little difficulty in the group meeting both its capex and dividend commitments – even if the latter were to be increased. We maintain OVERWEIGHT on the sector, with sectorial top picks of PCHEM (OP; TP: RM11.00) and ARMADA (OP; TP: RM0.63).

Focused on continued recovery and energy transition. Petronas had just released its Activity Outlook report for 2023−2025, providing insights on demand outlook and forecasted activities for the next few years. In the report, Petronas highlighted that uncertainty in the energy market is still expected to continue, hence industry players need to be more agile. Petronas also emphasised on embracing the energy transition trend, and reiterated its commitment to accelerate efforts to decarbonise operations to meet its projected net-zero carbon goals by 2050.

Positive activity outlook. Nonetheless, the activity outlook for Petronas remains positive, in line with the continued recovery that we have seen throughout 2022. Specifically, Petronas mentioned that this is positive for drilling rigs, well services activities and underwater services due to repair and maintenance activities required to maintain the integrity of offshore facilities.

The detailed breakdown of the activity outlook for several notable value chains are as follows:

Drilling rigs. Activities in 2022 went as planned, with the actual number of rigs utilised falling short of only 1, with 20 rigs utilised versus 21 initially planned. In 2023, Petronas is expected to utilise 26 drilling rigs. More encouragingly, the number of jack-up rigs is expected to jump from 9 to 12, while hydraulic workout units (HWU) are expected to rise from 6 to 8. This is expected to benefit jack-up rig provider VELESTO (OP, TP: RM0.16), as well as UZMA (OP, TP: RM0.67) which also operates in the HWU space.

Offshore fabrication. 2023 will see a total of 9 fixed structures fabrication versus the actual 7 in 2022 (higher than the initially planned 5). This will benefit fabricators e.g. SAPNRG (NR) and MHB (NR).

Floating structures (e.g. FPSO/FSO). No floating structure projects were executed in 2022, and that remains the case for 2023. No impact to any listed companies as all three of our Bursa-listed FPSO players i.e. YINSON (OP, TP: RM3.15), ARMADA (OP, TP: RM0.63) and MISC (OP, TP: RM7.30) have already moved on to other international bids after the Limbayong FPSO tender failed to materialise previously.

Hook-up and commissioning (HUC). 2023 is expected to see 5m man-hours from a jump of only 3.4m in 2022 (falling short of the initially planned 4.5m due to lockdown activities earlier in the year). This is expected to benefit DAYANG (OP, TP: RM1.70).

Offshore maintenance, construction and modification (MCM). 2023 is expected to see the number of man-hours jump to 11.9m, from 8.7m in 2022 (almost in line with planned figures). Again, this would benefit DAYANG seeing that it is the largest player in the MCM and HUC spaces.

Offshore support vessels (OSV). Demand for OSVs is expected to remain steady going into 2023, especially for vessels supporting drilling and wells projects. It was also reported in the press that Petronas is looking to increase its cut-off age for vessels to 20 years, from the existing 15 years. This will benefit the likes of ICON (NR), PERDANA (NR) and ALAM (NR).

Positive takeaways with no key losers. Overall, we are positive on our read-through of the activity outlook, and have found no key losers this time round. Meanwhile, we have identified the key winners to be: (i) the drilling provider i.e. UZMA (via HWUs), and more prominently, VELESTO (jack-ups); and (ii) the MCM and HUC space, whereby DAYANG is the biggest player.

Petronas capex expected to stay at 2022 level. Going into 2023, we are expecting Petronas capex to stay at 2022 level (estimated at RM60b), with the oil and gas upstream segment remaining the largest area of investment, and as such, we should see sustained activity levels. Petronas’ current net cash position remains strong at RM103b – the highest it has ever been since end-FY18, further boosted by the current strong oil prices. Therefore we see little difficulty in Petronas meeting both its capex and dividend commitments, even if it were to raise its dividends in 2023 from the originally intended RM35b (from 2022 ’s RM50b).

Maintain OVERWEIGHT on the sector, premised on: (i) oil prices remaining elevated at current levels; (ii) the recovery in investment spending and activity levels from oil majors; and (iii) undemanding valuations and buying opportunities throughout the sector. No changes to our 2023 average Brent crude oil assumption of USD80 per barrel. Our sector top picks are PCHEM and ARMADA.

Source: Kenanga Research - 20 Dec 2022