Investment Highlights

• Mixed 1QCY23 report card. Companies within our coverage delivered a mixed 1QCY23 earnings with only 1 company outperformed (Deleum) and 3 in line with our expectations (Bumi Armada, MISC and Petronas Gas). Meanwhile, Dialog Group and Hibiscus Petroleum earnings were below expectations, hence dragging down the sector’s overall performance for the quarter.
  
  Dialog Group’s earnings continued to be impacted by persistent margin contraction in the downstream engineering, construction, fabrication, and plant maintenance operations, which more than offset the additional earnings contributions from its Thailand upstream assets. Meanwhile, Hibiscus Petroleum were impacted by lower average selling prices amidst the decline in crude oil prices.
   
• Sector earnings softened QoQ. The sector’s 1QCY23 core net profit fell by 13% QoQ to RM2.5bil in tandem with a similar percentage drop in revenue to RM16.3bil, largely dragged down by lower contributions from MISC and Hibiscus Petroleum. MISC’s 1QFY23 earnings were dragged by weaker contributions across all key operating segments while Hibiscus Petroleum’s performance was impacted by lower realised oil prices. In contrast, Petronas Gas’ earnings recovered due to lower internal gas consumption expenses.
   
• Sharp decline in 1QCY23 contract awards. 1QCY23 contract awards to Malaysian oil and gas companies dipped by 68% QoQ to RM1.9bil from RM6.0bil in 4QCY22 mainly due to the non-repeat of several lumpy contracts awarded in the previous quarter. Also note that 4Q typically coincides with seasonally stronger contract flows, as witnessed by Petronas’ quarterly capex trend throughout the years. We expect oil and gas job flows to remain healthy in 2023 backed by a sustainable capex spending by Petronas. This is premised on Petronas’ target to spend RM300bil for capex in the next 5 years, translating into an annual capex of RM60bil, which implies a vigorous pipeline of projects to be dished out by the national oil company.

• Resilient outlook for offshore equipment and service provider. Prospects for offshore equipment and service providers, such as floating production, storage, and offloading (FPSO) players, are expected to remain resilient supported by elevated offshore developments. In addition, as highlighted in the Petronas Activity Outlook 2023-2025, rig operators (Velesto Energy and Icon Offshore) and platform fabricators (MHHE and Sapura Energy) are also anticipated to benefit from the rising upstream activities over the next 3 years. This had already been shown by a number of sizable contracts awarded by Petronas, particularly to Velesto Energy and MMHE which had collectively secured contracts worth RM6.6bil over the last 2 quarters.

• Lower full-year oil price projection of US$83/barrel in 2023. As recessionary fears continue to outweigh the still resilient oil market’s demand-supply dynamics, we lower our 2023 average oil price projection slightly to US$83/barrel from US$85/barrel previously. As a comparison, the EIA’s Short-Term Energy Outlook projects crude oil prices at US$79.54/barrel for 2023 and US$83.51/barrel for 2024. Despite the recent oil price weakness amid looming recession fears in developed countries, we opine that the higher global oil demand particularly from China coupled with the production cut by OPEC+ would lead to a tighter supply market in the second half of 2023. This would in turn exert upward momentum on oil prices, pushing it back up to above US$80/barrel levels over the coming months.
  
  Also recall that OPEC+ had in April 2023 announced a total production cut amounting to 3.66 million barrels per day (bpd) through the end of 2023 which represents 3.6% of global oil demand. It has further surprised the market lately by extending the production cut to 2024 as well as reducing 2024 production targets by a further 1.4 million bpd. Saudi Arabia also pledged an additional voluntary oil output reduction of 1 million bpd for July 2023, which could be extended. This again demonstrates the oil cartel’s commitment to keeping oil prices elevated. We also see further upside to oil prices should Saudi Arabia decides to extend the 1 million bpd output cut from July until the end of 2023.

• Maintain OVERWEIGHT on the sector. Our top picks for the sector remain Dialog Group (BUY, FV: RM3.31) which is supported by its resilient noncyclical tank terminal and maintenance-based operations. We also like Petronas Gas (BUY, FV: 19.39), which offers a decent dividend yield of 4.7% from an optimized capital structure and its resilient earnings

Source: AmInvest Research - 8 Jun 2023