O&G’s long-term value still intact

DESPITE the headwinds facing Malaysia’s oil and gas (O&G) sector, UOB Kay Hian (UOBKH) Research believes the industry still holds long-term value.

While structural shifts at Petroliam Nasional Bhd (PETRONAS) and geopolitical uncertainties present risks, opportunities remain for investors willing to navigate the volatility, the brokerage opines.

Maintaining an optimistic outlook, UOBKH Research retains its “overweight” recommendation on the oil and gas industry, citing trading opportunities and long-term resilience for key players in the market.

The research house expects sector valuations to rebound as long as PETRONAS stays on course with its production targets.

PETRONAS Activity Outlook 2025-2027 reaffirms the national oil company’s commitment to sustaining local O&G production at two million barrels of oil equivalent per day.

However, UOBKH Research warns that geopolitical risks and structural changes within the industry could pose challenges in the short term.

It highlights Yinson Holdings Bhd as its top sector pick, maintaining a “buy” rating with a target price of RM3.75 per share.

As a global market leader not reliant on PETRONAS, Yinson is seen as a strong player amid industry fluctuations.

The research house also favours Dialog Group Bhd, recommending “buy” with a target price of RM3 a share, citing the company’s diversified business strategy, role in crude storage and exposure to the Johor/Pengerang theme.

Deleum Bhd is another standout for its expertise in gas turbine maintenance, alongside proven performers such as Dayang Enterprise Holdings Bhd and T7 Global Bhd, both recognised for their execution capabilities in the sector.

Right-sizing impact

A key development shaping the industry is PETRONAS’ plan for a massive right-sizing exercise.

Addressing months of speculation, president and group CEO Tan Sri Tengku Muhammad Taufik recently confirmed that the restructuring will primarily target administrative roles, or “enablers”.

“If we don’t do it now, there will be no PETRONAS in 10 years,” Taufik asserts.

This restructuring is not unique to PETRONAS.

International oil majors such as ExxonMobil and Shell have also cut jobs in response to energy transition trends and a prolonged decline in oil prices.

PETRONAS’ move appears to be a strategic response to evolving industry dynamics, rather than solely a reaction to the cessation of its Sarawak gas aggregator role, which will be transferred to Petroleum Sarawak Bhd (Petros).

Despite Taufik’s reassurances, UOBKH Research expresses concerns over the timing of the exercise, particularly as it coincides with major plant turnarounds.

“The Shell MDS (SMDS) legal case will likely cast further uncertainties in the industry,” the research house notes, referring to the recent injunction by SMDS against PETRONAS and Petros, which has raised questions about the validity of gas sales agreements (GSAs) in Sarawak.

Beyond workforce reductions, PETRONAS is also reconfiguring its production sharing contracts (PSCs) to reflect higher risks associated with upstream projects.

Taufik acknowledges that PETRONAS’ margins have narrowed significantly, from above 20% in the past to low double digits.

As a result, new PSC terms have become more favourable to investors, benefiting players such as Hibiscus Petroleum Bhd, Dialog, and Sapura Energy Bhd.

PETRONAS company is also doubling down on diversification efforts.

It has allocated 20% to 25% of its annual capital expenditure to non-traditional businesses, including carbon capture, utilisation and storage.

This aligns with its broader strategy of sustaining long-term growth amid the global shift towards cleaner energy.

Lingering doubts

Despite statements from Prime Minister Datuk Seri Anwar Ibrahim and Sarawak Premier Tan Sri Abang Johari Tun Openg that the PETRONAS-Petros issue is resolved, UOBKH Research believes it will take time to convince the market.

“We opine that it may take time to convince the markets,” it states, pointing to ongoing legal disputes that undermine confidence in the agreement.

One of the biggest red flags is the SMDS court injunction, which effectively suspends millions in payments for Bintulu gas supplies.

The High Court’s decision contradicts official reassurances that all existing agreements remain intact.

“The High Court’s decision to grant SMDS the injunction is a legal confirmation that the issue remains unresolved,” UOBKH Research observes.

This ruling sets a precedent that could trigger similar disputes from other GSA customers in Sarawak.

The situation is further complicated by ambiguity in government statements.

Minister in the Prime Minister’s Department (Law and Institutional Reform) Datuk Seri Azalina Othman recently reiterated that PETRONAS has accepted Petros’ role as a gas aggregator, yet her remarks leave room for interpretation.

Azalina’s statement suggests that while existing liquefied natural gas (LNG) contracts will not be disrupted, future gas sales from upcoming fields will be subject to new agreements dictated by Petros.

This signals a shift in power dynamics that could alter the way PETRONAS operates in Sarawak.

Beyond legal and structural concerns, UOBKH Research flags governance risks within PETRONAS.

Notably, the company no longer reports financials on a quarterly basis, and its board of directors has seen notable changes.

“There are presently only six directors, out of which only two are independent,” the research house notes, highlighting a lack of transparency in PETRONAS’ governance framework.

Earnings risks

PETRONAS’ workforce reduction comes at a critical juncture.

According to the PETRONAS Activity Outlook 2025-2027, peak manpower demand for plant turnarounds is expected to hit 25,000 workers during key periods, such as the second quarter of 2025 (2Q25) and 2Q26.

With wages reportedly as low as RM7 per hour for some technical roles, the ability to secure skilled manpower remains a challenge.

“We are concerned that the downsizing of administrative roles, and the low employee morale (assuming the exercise clashes with the Ramadan period), may contribute to further delays for contractors in executing the turnarounds,” UOBKH Research warns.

While PETRONAS’ restructuring is not entirely driven by the Petros event, the broader implications of the saga extend across the supply chain.

PETRONAS Carigali Sdn Bhd (Sarawak Assets), which employs over 2,000 workers and manages more than 100 offshore and onshore facilities, faces an uncertain future.

Moreover, PETRONAS’ ability to maintain its target of a 10% global market share in LNG exports is increasingly in doubt.