By ASILA JALIL / Pic BLOOMBERG

THE sustainable rally in energy prices has analysts upgrading the oil and gas (O&G) sector, including MIDF Amanah Investment Bhd (MIDF Research) that has upgraded its call on the sector to ‘Positive’ for both upstream and downstream subsegments.

The research house stated that both segments will benefit from the rally in oil price in terms of potential new contract awards, following a more palatable price for oil, increase in product prices and spread for downstream industry players.

“Despite the absence of revision in exploration and production (E&P) capital expenditure from the oil majors, we opine the recovery narrative for the sector remains on track, given that a more selected spending approach will result in a more sustained recovery, and significant uptick in activities within the O&G sector is expected to take place in the second half of 2021 (2H21),” the research unit noted in an exchange filing yesterday.

MIDF Research stated that the upgrade on the sector to ‘Positive’ is timely as it expects O&G players to register stronger year-on-year earnings growth in financial year 2021 (FY21) after a series of commendable earnings recovery recorded since the third quarter of 2020.

Its analyst Noor Athila Mohd Razali stated that the earnings projection was in line with MIDF’s higher crude oil assumption for FY21 at US$58 (RM238.38) per barrel from US$51 per barrel previously.

MIDF Research said companies with resilient business models remain its top picks and continue to favour companies that have been bracing the pandemic successfully.

It recommends companies with strong fundamentals, stable recur- ring income, good business segmentation and well-diversified revenue base, such as Dialog Group Bhd.

MIDF has a ‘Buy’ call on the counter with a target price (TP) of RM4.30, along with Serba Dinamik Holdings Bhd (Not rated, fair value: RM2.88) and Gas Malaysia Bhd (‘Buy’, TP: RM3.22).

For companies that are proxies to the volatility in oil price, MIDF Research recommends Sapura Energy Bhd (‘Buy’, TP: 16 sen) and Malaysia Marine and Heavy Engineering Holdings Bhd (‘Trading Buy’, TP: 49 sen) as these companies are expected to benefit from increased E&P spending from oil majors and national oil companies, like Petroliam Nasional Bhd (Petronas), should energy prices continue to recover.

In terms of dividend play, MIDF Research recommends Favelle Favco Bhd (‘Buy’, TP: RM3) and Petronas Gas Bhd (PetGas) (‘Buy’, TP: RM17.90) as both companies have registered stable recurring income and consistent dividend payout for the past three years.

Noor Athila noted that Petronas remains committed to ensuring sustained offshore activities for local O&G players, but she takes note of the cautious stance it is taking given the persistent uncertainty and sluggish demand recovery due to Covid-19 in the past few months.

“We are reassured of the Malaysian O&G recovery trajectory given Petronas is now expected to increase its E&P spending in FY21 to possibly between RM40 billion and RM45 billion, as opposed to the RM33 billion it spent in FY20,” she said.

MIDF Research named Petronas Chemicals Bhd (‘Buy’, TP: RM8.03) and PetGas (‘Buy’, TP: RM17.90) as its top environmental, social and governance (ESG) picks, given Petronas’ commitment in reaching zero-carbon emission by 2025 and various other internal ESG-driven initiatives.

It also likes Gas Malaysia for pro- viding cleaner energy alternatives such as natural gas to businesses nationwide and its potential to become the replacement for coal-powered plants in the near future, following the upcoming expiration of the current power purchase agreements in 2023.

The International Energy Agency is expecting oil demand to grow by 5.5 million barrels per day (mbpd) to 97.2 mbpd from 91.7 mbpd last year, driven by stronger demand in 2H21 with progress made on the vaccination front. Supply is expected to rise by 1.6 mbpd in FY21.

OPEC is expecting demand to grow by 5.8 mbpd in 2021, driven by the recovery in the transportation and petrochemical sectors, she added.

The recent decision by the OPEC+ alliance to maintain its current production cut through May has also provided a major boost to oil prices.

“As the current output cut will remain only through May 2021, we expect the oil price will normalise to the US$60-US$65 per barrel level from June 2021 onwards following the return of supply into the market,” she said.