• Maintain OVERWEIGHT; Top Picks: Yinson, Bumi Armada, and Coastal Contracts. We believe elevated oil prices will continue to bode well for a sector recovery, with anticipation of higher capex and opex spending by clients. While the National Energy Policy (NEP) 2022-2040 calls for more aggressive emission reduction initiatives, the expectation of additional investments in deepwater and sour gas projects could provide job opportunities for upstream players in the medium term. We remain bullish on FPSO players due to robust demand and their resilient earnings.

• Our thoughts on NEP 2022-2040. Despite oil and petroleum products in the primary energy mix being projected to lower to 27% in 2040 from 2018’s 30%, absolute consumption is still set to grow by 5.5% between 2018 and 2040, which implies a marginal CAGR of 0.2%. This also shows that oil and petroleum products will remain fairly relevant over the next two decades. We also see plans to increase upstream investments to develop deepwater, marginal, and sour gas fields, which could sustain domestic job flows for the upstream services players. Meanwhile, there are initiatives to set national limits and commit to zero continuous flaring and venting emissions to reduce upstream GHG emissions. We think this will enforce the sector to expedite its sustainability journey.

• Petronas’ hydrocarbon spending to sustain. Looking past a seasonally weaker 4Q22, we expect upstream activities to remain robust in 2023 on sustainable capex and opex spending. Similar in the past few years, there is a possibility of Petronas underspending its capex (below the guided MYR60bn at c.MYR50-55bn), given that 1H22 capex only accounted for a third of the full-year target. 2023 total capex is likely to be lower YoY in the absence of lumpy acquisitions – eg Petronas Chemicals’ Perstorp acquisition – but we estimate it will remain in the range of MYR45-50bn, with oil & gas (O&G) spending to remain robust.

• Potential replenishments with higher rate revisions. As such, upstream activities are projected to remain elevated to capitalise on high oil prices. We expect more domestic maintenance and drilling contracts to be awarded, with the possibility of higher rate revisions to cushion rising cost of doing business amidst tighter supply. On the international front, we remain bullish on the FPSO space – backed by a healthy projects pipeline while major contractors remain occupied with contracts in hand.

• Stronger USD impact. While historically oil prices are inversely related to the USD, we generally see positive impacts from the continuous strengthening of the US currency on selective oil and gas companies that generated revenue predominantly in USD. This includes E&P, petrochemical, transport, and FPSO players. Downside risk to our call: Weaker-than-expected oil prices, lower-than-expected spending by energy companies, and higher-than-expected operating costs.

Source: RHB Securities Research - 25 Oct 2022