Kenanga Research & Investment

Oil & Gas - Clarity on Sustainability for OGSE players

Publish date: Tue, 11 Apr 2023, 10:23 AM

We recently organised a seminar on the oil and gas sector, featuring speakers from the Malaysia Petroleum Resources Corporation (MPRC) and VELESTO (UP, TP: RM0.19), to share insights on the activity outlook, as well as their approach on sustainability. We gathered that activity levels for oil and gas service and equipment (OGSE) players are on the rise, although the industry is still facing many structural challenges (e.g. internationally uncompetitive and over-reliance on locally-derived revenue). Meanwhile, we are also heartened by the firm commitment, underpinned by a systematic approach, to ensure that the domestic 2,376 OGSE players are onboard the journey towards achieving the national net-zero aspiration by 2050. We believe MPRC’s guidance and lead in driving key initiatives will pave the way for the OGSE industry’s smooth transition towards a sustainable model. We maintain NEUTRAL on the sector, given limited catalyst for big-cap names, with our sector top picks such as ARMADA (OP, TP: RM0.75) and WASEONG (OP, TP: RM0.97).

Oil and gas seminar. We recently organised a seminar on oil and gas sector, with speakers that include representatives from MPRC and VELESTO. The purpose of the event was to gather further insights on the activities outlook within the OGSE space, as well as the industry’s approach towards sustainability. MPRC is an agency under the Ministry of Economy (MoE). Established in April 2011, it provides recommendations and implements initiatives to advance Malaysia’s OGSE industry and drive the sector’s development towards cleaner and sustainable energy. VELESTO is the largest offshore drilling services provider in the country, operating a fleet of six jack-up rigs and four hydraulic workover units.

Activity levels on the rise. Overall, one of our main takeaways is that activity levels for OGSE players are on the rise across various value chains – e.g. drilling rigs, offshore fabrication, hook-up and commissioning (HUC), maintenance, construction and modification (MCM) and as well as offshore support vessels (OSV). We see this as a result of Petronas’ guidance of increased capex – allocating RM300b over the next five years, which averages out to RM60b per year, the highest it has ever been since 2015. One noteworthy mention is that brownfield job opportunities would be far greater than greenfield opportunities, although we reckon that most of the OGSE players are also operating within that space, with listed companies to include the likes of DAYANG and UZMA. Specifically for the jack-up drilling rig space, regional Southeast Asian market has already reached a marketed utilisation of 95%, while Malaysia has already reached 100% (i.e. there are no more available rigs for tender of new jobs) – strongly benefitting VELESTO given its market leading position within this space.

The industry’s transition into low carbon. Malaysia’s oil and gas services and equipment industry is a significant component in the country’s economy, contributing 5%−8% of its gross domestic product (GDP). With 2,376 companies comprising main contractors, subcontractors, specialists, consultants, vendors and agents, the OGSE industry generated some RM68b revenue in 2021. In terms of revenue contribution, 74% was from the top 100 OGSE (OGSE100) companies as ranked by the Malaysian Petroleum Resources Corporation based on revenue while 14% was from non-OGSE100 midtiers and 12% from non-OGSE100 small and medium enterprises (SMEs).

Source: Kenanga Research - 11 Apr 2023

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