O&G sector earnings weakness to persist in 2Q
PETALING JAYA: Local companies involved in the oil and gas services and equipment (OGSE) industry could see lower offshore activities and jobs.
This follows the shift in Opec's policies, which may result in lower capital expenditure (capex) anticipated from oil majors.
Coupled with softer outlook displayed by oil & gas (O&G) companies during the recent first quarter of 2025 (1Q25), Maybank Investment Bank (Maybank IB) Research has downgraded the sector to Neutral from Positive.
"Our Brent crude oil price assumption was also lowered to US$67 per barrel for 2025, from US$70 in our earlier May 6 report," the research firm said.
The research firm said most O&G companies under its coverage met expectations but it expects softer outlook ahead.
"Out of six Malaysia O&G stocks under coverage, Velesto Energy Bhd 's results came in above expectations due to higher-than-expected net margins driven by lower depreciation and cost optimisation initiatives.
Bumi Armada Bhd missed expectations due to a recognition of a penalty to UK-based EnQuest due to certain asset specification issues. Results for other companies came in within expectations," it added.
It noted that daily rates for renting rigs have peaked due to a higher rig supply as Saudi Arabia terminated over 20 rigs amid capex rationalisation programme by oil company Saudi Aramco.
According to Maybank IB this was indicated in Velesto's updated rig schedule and its recent job wins in Vietnam & Indonesia.
Meanwhile, it said Keyfield International Bhd and Perdana Petroleum Bhd stated subdued offshore activity and charter projects delayed in 1Q25 as compared to a year ago. This is a signal of softer operating environment ahead, said the research firm.
There could be potential cuts to Petroliam Nasional Bhd (PETRONAS) spending due to the dispute between the former and Sarawak's Petros over the role of gas aggregator in Sarawak. In addition, lower crude oil prices could deter aggressive capex spending in general.
Similarly, CIMB Securities lowered its sector rating to Neutral from an Overweight. Following the earnings weakness in 1Q25, it has revised 2025 sector core net profit growth forecast to -7.8% year-on-year, from +0.9% previously.
"This suggests a reset to a lower earnings base, reaching a fresh low in the sector's declining earnings trend observed since 2021.
"We anticipate earnings recovery to be gradual, constrained by structural challenges and company-specific headwinds," added CIMB.
Where stocks are concerned its likes MISC Bhd for its stable earnings, backed by long-term contracts across its gas, petroleum, and offshore segments, as well as full earnings contribution from FPSO Mero 3 in 2025.
The other stock it favours is Dialog Group Bhd , which has strong growth potential in Pengerang, Johor.
It said the group has stable recurring income from storage terminals, with utilisation rates above 90% and spot rates of around SG$6.50 per cubic metre.
There is also a potential turnaround in the group's engineering, procurement, construction, and commissioning (EPCC) and maintenance segments from the first half of financial year 2026 onwards.
Dialog's valuation is also attractive at 20.1 times price-to-earnings, which is about 1 standard deviation below the 10-year mean of 28.1 times.
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