We maintained our 2023 average Brent crude oil price assumption at USD80 per barrel, with global demand is still expected to stay healthy above the 100m barrels per day mark throughout the year. We expect activity levels to stay robust locally on sustained capex spending by Petronas. Similarly, we expect global E&P capex spending to continue its upwards trend in 2023, well surpassing pre-pandemic levels, on the heels of the massive under-investment throughout the past few years. Meanwhile, sector valuations have lagged the significant improvement in both underlying fundamentals and earnings of oil & gas players underpinned by sustained high oil prices over the last 12 months. We maintain OVERWEIGHT on the sector, and our sector top picks are PCHEM (OP; TP: RM11.00) and ARMADA (OP; TP: RM0.63).

Oil prices healthy enough for activity levels. We maintain our 2023 average Brent crude oil price assumption at USD80 per barrel. Nonetheless, this is still far higher than pandemic and even pre-pandemic levels, with oil demand expected to stay steady above the 100m barrels/day mark throughout the year. We expect depleting global inventories in early-2023 to push Brent prices up back to around the USD90 per barrel level, although some downward pressures could emerge in 2HCY23 barring the possibility of further supply disruptions. Upside risks to our assumptions include a sooner-than-expected China reopening, while possible downside risks include potential global recessionary impacts affecting demand.

Expected ramp-up in spending and activity levels. We are still expecting Petronas to reach a full-year capex of RM60b in 2022. YTD, Petronas has incurred a capex of only RM27.4b (a 35% jump YoY), and hence, we are still anticipating back-loaded spending in 4QCY22. We note that 4Q has always been the seasonally strongest quarter for Petronas capex spend over the past few years (as reference, 4QFY21 capex spend constituted 41% of the full-year’s capex spend of RM30.5b).

Going into 2023, we are expecting Petronas capex to stay levelled from 2022 levels, with oil and gas upstream still remaining the largest area of investment, and as such, we should see sustained activity levels. Petronas’ current net-cash position remains strong at RM103b – highest it has ever been since end-FY18, further helped by the current strong oil prices, and as such, we see little difficulties 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 of RM50b). Prime beneficiaries of higher Petronas capex, and in sustained local activity levels, include the likes of DAYANG (OP; TP: RM1.70) (from higher demand for offshore maintenance, and hook-up and commissioning works), UZMA (OP; TP: RM0.67) (on higher brownfield activities – e.g., well services, oil production enhancements), as well as VELESTO (OP; TP: RM0.16) (from pick-up in demand for jack-up drilling rigs).

Meanwhile, globally, 2023 is expected to see a further ramp-up in offshore exploration and production (E&P) capex, especially from 2020-2022 levels, as an aftermath of under-investments in the industry over the past several years. All three of our Bursa-listed FPSO players, i.e. YINSON (OP; TP: RM3.15), MISC (MP; TP: RM7.30), and ARMADA, have been actively participating in international job bids, with opportunities emerging from Latin America, Asia Pacific and Africa. The FPSO space is starting to see a supply squeeze – i.e., many global FPSO players are already pre-occupied with jobs developing at hand, and hence, more recent bids have started to see very few bidders, making it very much an operator market.

Source: Kenanga Research - 5 Jan 2023