Rougher waters ahead for oil and gas players

PETALING JAYA: The oil and gas sector has been downgraded by some analysts due to the recent tariff announcements by the United States.

In a report to clients, Kenanga Research said it has downgraded the sector from “overweight” to “neutral” following sweeping tariffs announced by the United States that could further dampen demand for oil and petrochemical products.

“In making this call, we are cognisant that near down-cycle valuations are already being seen in several stocks and consider that a re-rating catalyst may still be elusive until the impact of tariffs and macro uncertainties unwind,” the research house said.

“Our Brent crude average forecast is revised down to US$64 per barrel from US$77 per barrel for this year and to US$67 from US$74 for next year, reflecting weaker-than-expected crude demand versus consensus, compounded further by production ramp-up from The Organization of the Petroleum Exporting Countries.

“As a result, we expect upstream activity levels this year to be slightly weaker compared with last year and the downgrade in our target-valuation multiples is to reflect the increased near to medium-term earnings uncertainty.”

The research house said, in upstream services, after imputing less optimistic daily charter rates due to the current economic backdrop, its preferred play is Keyfield International Bhd.

“We think that its younger fleet would rebound faster in terms of earnings if the cycle turns back up.”

Kenanga Research said that most companies under its coverage now maintained much stronger balance sheets compared to the Covid-19 period, which could accelerate potential re-rating versus past cycles when the outlook eventually brightens.

The research house said PETRONAS Chemicals Group Bhd (PetChem) had been its sector pick based on a recovery of the petrochemical market, which looks now to be more protracted in face of tariffs.

“Our thesis unfortunately is unlikely to materialise and absent of a catalyst for sustained rebound in PetChem, which we lower to ‘market perform’ despite trading near two standard deviations under its price-to-book value (PBV) band.

“In its place, our new sector pick is Dialog Group Bhd, which offers stronger earnings resilience during downturns and attractive valuation at below one standard deviation of PBV levels.”

Hong Leong Investment Bank Research said there are no signs of demand slowdown yet.

“Despite a marginal decline in requirements for offshore support vessels (OSVs) due to an expected reduction in drilling activity this year, the Malaysia OSV Owners’ Association still sees buoyant OSV demand this year.

“The slight demand drop in rig count to 20 this year versus 23 last year is unlikely to pose a material dent in local OSV demand as rig operations mainly rely on bigger vessels, which are mostly foreign-owned.”

The research house said although local fleets are prioritised under government policy, 30% of more than 300 vessels operating in local oil and gas sector are foreign-flagged, indicating the local OSV capacity crunch is covered by foreign vessels.