KUALA LUMPUR (Jan 5): Kenanga Research maintained its "overweight" call on the oil and gas sector, as oil prices remain elevated and activity levels stay robust, while undemanding valuations and buying opportunities continue throughout the sector. 

The research house said the sector valuations have yet to reflect the fundamental recovery despite strong oil prices, as the KL Energy Index is below 2019 levels, and has been trading at divergence against the Brent crude since mid-2021. 

“The valuation of the KL Energy index is currently near a trough, despite the stronger corporate earnings seen especially in the recently concluded quarter, suggesting that share prices have yet to fully reflect the underlying fundamental recovery within the sector,” said research analyst Steven Chan. 

The research house’s top picks for the sector are Petronas Chemicals Group Bhd ("outperform"; target price or TP: RM11) and Bumi Armada Bhd ("outperform"; TP: 63 sen). 

In a research note on Thursday (Jan 5), Kenanga said that its 2023 average Brent crude oil price assumption stands at US$80 per barrel, and global inventories are expected to deplete in early 2023 to push Brent prices up back to US$90 per barrel. 

However, it forewarned that some downward pressures could emerge in the second half of calendar year 2023 (CY2023), barring the possibility of further supply disruptions. 

“Upside risks to our assumptions include a sooner-than-expected China reopening, while possible downside risks include potential global recessionary impacts affecting demand,” said Chan. 

Meanwhile, the research house anticipates back-loaded spending by Petroliam Nasional Bhd (Petronas) on its capital expenditure (capex) in the fourth quarter of CY2023, as the final quarter has traditionally been the strongest for Petronas capex spend.

“Going into 2023, we expect Petronas' capex to stay levelled from 2022 levels, with oil and gas upstream still remaining the largest area of investment, and as such, we should see sustained activity levels. 

“Petronas’ current net cash position remains strong at RM103 billion — the highest it has ever been since end-financial year 2018 — and further helped by current strong oil prices. As such, we see little difficulties in Petronas meeting both its capex and dividend commitments, even if it were to raise its dividends in 2023 from the originally intended RM35 billion (from RM50 billion for 2022).” 

Kenanga said prime beneficiaries of higher Petronas capex include the likes of Dayang Enterprise Holdings Bhd ("outperform"; TP: RM1.70), Uzma Bhd ("outperform"; TP: 67 sen), and Velesto Energy Bhd ("outperform"; TP: 16 sen). 

Chan also added that the year is expected to see further ramp-up in offshore exploration and production, as an aftermath of under-investments in the industry over the past years. 

“The floating production storage and offloading (FPSO) space is starting to see a supply squeeze. Many global FPSO players are already pre-occupied with jobs developing at hand, and hence, more recent bids have started to see very few bidders, making it very much an operator market.” 

It noted that three Bursa Malaysia-listed FPSO players, namely Yinson Holdings Bhd ("outperform"; TP: RM3.15), MISC Bhd ("market perform"; TP: RM7.30), and Bumi Armada, have been actively participating in international job bids, with opportunities emerging from Latin America, Asia-Pacific and Africa.