Bright spots ahead for oil and gas companies

PETALING JAYA: Malaysia’s oil and gas sector looks set for a challenging period ahead, with volatility in crude oil prices and shifting global production dynamics weighing on upstream earnings prospects, while select downstream and logistics players may benefit.

Last week’s unexpected plunge in Brent crude prices below US$66 per barrel sparked renewed concerns across the energy value chain.

According to CGS International Research (CGSI Research), this was driven by two key factors – the escalation of global trade tensions, and a surprise decision by the Organization of Petroleum Exporting Countries (Opec) to raise production more aggressively than expected.

“Opec deviated from their plan and announced an increase in production of 0.411 million barrels per day (mbpd) from May, three times the planned monthly increase,” CGSI Research said, citing shipping consultancy Poten.

While the oil alliance had earlier planned to gradually unwind 2.2mbpd of voluntary cuts, the abrupt production boost added pressure to already declining oil prices.

CGSI Research noted that the decision might have been influenced by expectations of tighter US sanctions on major oil-producing nations.

“The most likely reason for the higher production target in May is that Opec may be expecting tighter US sanctions against Iran, Russia and Venezuela to crimp their oil exports.”

In the Malaysian context, upstream player Hibiscus Petroleum Bhd showed the highest sensitivity to oil prices.

“In our Malaysian oil and gas coverage, Hibiscus has recorded the highest share price correlation of 82% to Brent since 2014,” CGSI Research noted.

Based on current assumptions of US$75 per barrel this year and US$70 from next year, a US$5 drop could severely impact earnings, the research house added.

“If we reduce this by US$5 per barrel, our core net profit forecast for Hibiscus for its financial year ending June 30, 2026 (FY26) will be cut by 35% while FY27’s will be 62% lower,” the research house said, adding other oil and gas services players also remained exposed.

“Oil and gas services companies have a historical share price correlation to Brent ranging from 29% for Velesto Energy Bhd to 39% for Wasco Bhd, driven by the impact on their revenues if oil companies cut their capital expenditure in a low oil price environment.”

Floating production storage and offloading (FPSO) vessel operator Yinson Holdings Bhd, which had typically shown resilience due to long-term contracts, may also face new challenges.

“Yinson’s historical correlation is low at 13% on account of its long-term contracts but we think the future correlation will be higher as it has committed to raise US$1bil in high-cost preference shares. In the event that oil prices decline significantly, FPSO contract awards could be delayed, which would leave Yinson in a quandary,” CGSI Research said.

On the downstream front, CGSI Research saw a mixed impact.

“PETRONAS Chemicals Group Bhd has a positive correlation of 36.2% as there will be selling price pressure given naphtha prices fall with crude oil and because feedstock costs for Kertih in Terengganu are fixed,” the research house said. Conversely, Lotte Chemical Titan Holdings Bhd could benefit as its naphtha feedstock costs drop in tandem with crude oil.

“Winners from lower oil prices include PETRONAS Dagangan Bhd (small positive correlation of 7.8%) as its jet fuel is sold at prices that lag the actual movement in spot jet fuel,” CGSI Research added.

MISC Bhd, too, was seen as a potential gainer, as “tanker shipping rates typically do well when there is more oil to transport”.

Meanwhile, Dialog Group Bhd’s diversified operations offered a hedge.

“Dialog has a small negative correlation as its tank terminals may see higher utilisation and higher storage rates due to overproduction of oil, potentially offsetting any downside to its upstream profits,” CGSI Research said.

With oil markets in flux, Malaysian oil and gas players may need to brace for a bumpy ride ahead, navigating shifting fundamentals while leveraging selective strengths across the value chain.

CGSI Research, however, reiterated “overweight” on the sector, with Dialog and MISC as its top picks.