According to Kenanga, the benchmark Brent contract price has been showing signs of stability, trading within the US$55 to US$70 per barrel range

by SULHI KHALID/ pic credit: www.petronas.com

THE gradual increase in oil prices is expected to drive a recovery in investment in upstream activities said Kenanga Investment Bank Bhd.

The research house said national oil and gas (O&G) company, Petroliam Nasional Bhd (Petronas), has maintained its capital expenditure (capex) by focusing on the upstream segment despite its commitment to deliver a higher dividend payout to the government.

The investment bank noted there has been an increased flow of engineering/construction jobs in the Middle East, while floater demand has jumped rapidly from South America.

Kenanga added that the benchmark Brent contract price has been showing signs of stability, trading within the US$55 (RM230.62) to US$70 per barrel range throughout the year.

The drone strikes in Saudi Arabia last month led to a sharp albeit temporary surge in crude prices.

Kenanga highlighted that continued production compliance from OPEC and Russia has helped ease supply-side worries, while the prolonged US-China trade tensions are currently spurring some demand-side concerns.

“Overall, we maintain our projected 2019-2020 average Brent price assumption at US$65/barrel. We believe this price range to be relatively comfortable for oil majors to commit to higher investments,” it said.

The Bursa Malaysia Energy Index currently has a year-to-date (YTD) gain of 34%, outperforming the FTSE Bursa Malaysia KLCI which has a YTD loss of 6%.

Maybank Investment Bank Bhd in a recent sector report, reiterated the “Positive” call on the O&G industry and foresee buoyant activities across the value chain in Malaysia based on Petronas’ Activity Outlook 2019-2021 report.

The investment bank forecast if crude oil price continues to average at about US$65 per barrel, this will continue to spur activities and spending by the sector worldwide.

Kenanga noted an improvement in contract flows in the sector with new jobs coming mostly from the upstream space for floaters, fabrication, maintenance and drilling services.

“While this can be seen as a clear sign of a bottoming-out, we note the recovery process could be long and gradual, with many of the local players still plagued with earnings uncertainties and balance sheet constraints. Cost optimisation still remains a key theme for new job tendering,” it said.

The bank favours defensive stocks with stable dividend, clear earnings delivery with a palatable balance sheet.

“We continue to be selective for a long-term investment approach, with top picks for the quarter are MISC Bhd and Serba Dinamik Holdings Bhd,” it noted.

MISC has a stable dividend yield of 4% and is seeking to tap into the global mega floating, production, storage and offloading market with active tenders in Brazil and elsewhere.

Serba Dinamik’s forward earnings are underpinned by its current order book of RM8.7 billion, and Kenanga expects more contract wins as its management targets to hit a RM10 billion orderbook by year end.

In June, Finance Minister Lim Guan Eng highlighted that stronger Brent prices is expected to revive exploration and production activities in the short-term.

Lim also pointed the Refinery and Petrochemical Integrated Development project in Johor is set to begin its operation in the fourth quarter of the year.

The mega project, which is a joint venture between Petronas and Saudi Arabian Oil Co, will witness a production of 300,000 barrels per day upon its commencement.

Kenanga has placed a “Neutral” call on the sector’s outlook, underpinned by limited upside to Petronas-linked counters.

“We remain selective with our stock picks for a long-term investment approach, favouring more defensive names with stable dividend, clear earnings delivery coupled with a palatable balance sheet,” it said.

Rakuten Trade Sdn Bhd VP (research) Vincent Lau said the sector is in a gradual recovery phase.

“We forecast Brent price to be at US$65/barrel next year,” he told The Malaysian Reserve last week.

Commenting on Prime Minister Tun Dr Mahathir Mohammed’s remark on the possibility of listing one of Petronas subsidiaries, Lau said the listing will certainly give a boost to investor sentiment of the local stock market.

“The potential listing of Petronas’s subsidiaries will indirectly be the catalyst for the O&G sector too,” he added.

Last month, Dr Mahathir expressed his view on the potential listing of Petronas upstream arm, Petronas Carigali Sdn Bhd, as part of the government’s effort to woo investors to invest in the local bourse.

The plan, if materialises, will see the exploration and production unit of Petronas having a potential market capitalisation of RM150 billion, an analyst previously said in 2010.

Petronas linked companies listed on Bursa Malaysia now include Petronas Chemical Group Bhd, Petronas Dagangan Bhd, Petronas Gas Bhd, MISC and KLCCP Stapled Group.