We maintain an Overweight stance on the Oil & Gas sector, supported by (i) steady crude oil imports from China, where Malaysia's market share is expanding, and (ii) resilient demand amid promising domestic developments led by Petronas through 2026. Considering expected oversupply, we have adjusted our Brent crude oil price forecasts to USD80/bbl for 2024 and USD75/bbl for 2025. Despite a tempered oil price outlook, Malaysia’s advantageous positioning and the growth trajectory shaped by Petronas support a positive outlook for the sector, with key beneficiaries including VELESTO (BUY, TP: RM0.30), MHB (BUY, TP: RM0.61), MISC (BUY, TP: RM9.24), PANTECH (BUY, TP: RM0.93), and PCHEM (BUY, TP: RM6.93).

China’s Crude Oil Imports Steady as Malaysian Share Expands. We remain optimistic that Malaysia will remain a significant player in China’s crude oil market. As Chinese refiners seek to diversify their sources and secure more favourable supply agreements, Malaysia’s proximity and established trade relations could further solidify its position. Continued investments in enhancing production capacity and infrastructure will also be critical for Malaysia to maintain and potentially grow its share in this key market.

Petronas Activity Outlook 2024–2026: Key Opportunities for Malaysia's Oil & Gas Sector. The Petronas Activity Outlook 2024–2026 forecasts steady growth across several core areas, positioning Malaysia’s oil and gas players to benefit from increased upstream and downstream activity. Key growth areas include drilling, particularly for wells across development and exploration, and offshore projects, such as fabrication, installation, and hook-up and commissioning (HUC) of new and existing structures. Additionally, the outlook highlights rising demand for floating production units, offshore support vessels, and specialty chemicals, underscoring sustained investment and activity levels. This robust pipeline aligns with Petronas’s strategic focus on sustainable production, providing an attractive environment for service providers and manufacturers alike.

Global Oil Production Growth Set to Outpace Demand in 2025. In September 2024, eight members of OPEC+ agreed to extend their voluntary production cuts of 2.2mn barrels per day until the end of November, with plans for a gradual monthly phase-out beginning December 1, 2024. These overproducing nations reiterated their commitment to fully compensate for the overproduction by September 2025. Consistent with the EIA's predictions, our estimates indicate that production will increase by 2.2% YoY in 2025, compared to an 1.3% growth in consumption. This anticipated oversupply of approximately 0.18mn barrels per day is likely to exert downward pressure on Brent crude oil prices. As a result, we have revised our Brent crude oil price forecasts for FY24 to USD 80 per barrel (down from USD 82) and for FY25 to USD 75 per barrel (down from USD 85).

Oil Production Costs Surge, But Shale Projects Remain Profitable. According to Rystad Energy’s Upstream Solution Report released in October, the costs of developing new upstream oil projects are continuing to rise due to ongoing inflationary pressures and supply chain challenges. The report shows that the average breakeven cost for non-OPEC oil projects has grown to $47 per barrel of Brent crude, marking a 5% increase over the past year. Therefore, we expect strong support at a minimum of $60 per barrel, while we believe the sweet spot for OPEC to achieve substantial returns lies between $70 and $80 per barrel.

War being the wildcard. Our base case assumes limited impact from the ongoing tensions in the Middle East and ongoing Russia-Ukraine war. Recent developments indicate a de-escalation in the situation, particularly after Iran's Supreme Leader, Ayatollah Ali Khamenei, signalled that there would be no direct retaliation to Israel's strikes within Iran. Although the possibility of a major supply disruption in the Middle East cannot be ruled out, market attention is likely to shift toward demand dynamics, particularly regarding China's economy and as the U.S. election approaches. However, should hostilities reignite and result in damage to oil and gas infrastructure in Iran, we could see prices surge to between USD 90 and 100 per barrel, given that Iran accounts for 4.3% of global oil production and 13.7% of OPECs production as of YTD and the possible collateral damage of shipping routes, particularly Strait of Hormuz.

We re-affirm our Overweight stance on the Oil & Gas sector as Malaysia solidifies its role in China's oil imports and anticipates Petronas-driven growth. Beneficiaries include VELESTO (BUY, TP: RM0.30), remains well-positioned to benefit from steady jack-up rig demand domestically; MHB (BUY, TP: RM0.61) for offshore fabrication and HUC activities; MISC (BUY, TP: RM9.24) for floating production solutions; PANTECH (BUY, TP: RM0.93) for line pipe supply; and PCHEM (BUY, TP: RM6.93), driven by rising demand for specialty chemicals and catalysts.

Source: TA Research - 30 Oct 2024