Sector Update

05 January 2023

Oil & Gas OVERWEIGHT

Oil Prices and Activity Levels to Sustain ↔
By Steven Chan /steven.chan@kenanga.com.my

We maintained our 2023 average Brent crude oil price assumption at USD80 per barrel, with
global demand is still expected to stay healthy above the 100m barrels per day mark
throughout the year. We expect activity levels to stay robust locally on sustained capex
spending by Petronas. Similarly, we expect global E&P capex spending to continue its
upwards trend in 2023, well surpassing pre-pandemic levels, on the heels of the massive
under-investment throughout the past few years. Meanwhile, sector valuations have lagged
the significant improvement in both underlying fundamentals and earnings of oil & gas
players underpinned by sustained high oil prices over the last 12 months. We maintain
OVERWEIGHT on the sector, and our sector top picks are PCHEM (OP; TP: RM11.00) and
ARMADA (OP; TP: RM0.63).

Oil prices healthy enough for activity levels. We maintain our 2023 average Brent crude oil price
assumption at USD80 per barrel. Nonetheless, this is still far higher than pandemic and even pre-pandemic
levels, with oil demand expected to stay steady above the 100m barrels/day mark throughout the year. We
expect depleting global inventories in early-2023 to push Brent prices up back to around the USD90 per
barrel level, although some downward pressures could emerge in 2HCY23 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.

World Oil Production vs Consumption

World liquid fuels production and consumption balance
million barrels per day
105
world production forecast
100
world consumption
95

90

85

//
80
0 Q1 Q1 Q1 Q1 Q1 Q1 Q1
2017 2018 2019 2020 2021 2022 2023
6
4 implied stock build
2
0
-2 implied stock draw
-4
Data source: U.S. Energy Information Administration, Short-Term Energy Outlook, December 2022
Source: EIA

Expected ramp-up in spending and activity levels. We are still
capex of RM60b in 2022. YTD, Petronas has incurred a capex of
hence, we are still anticipating back-loaded spending in 4QCY22.
seasonally strongest quarter for Petronas capex spend over the past
spend constituted 41% of the full-year’s capex spend of RM30.5b).
expecting Petronas to reach a full-year
only RM27.4b (a 35% jump YoY), and
We note that 4Q has always been the
few years (as reference, 4QFY21 capex

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Oil & Gas Sector Update
05 January 2023

Going into 2023, we are expecting 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 RM103b – highest it has ever been since end-FY18,
further helped by the current strong oil prices, and as such, we see little difficulties in Petronas meeting both
its capex and dividend commitments, even if it were to raise it s dividends in 2023 from the originally intended
RM35b (from 2022 of RM50b). Prime beneficiaries of higher Petronas capex, and in sustained local activity
levels, include the likes of DAYANG (OP; TP: RM1.70) (from higher demand for offshore maintenance, an d
hook-up and commissioning works), UZMA (OP; TP: RM0.67) (on higher brownfield activities – e.g., well
services, oil production enhancements), as well as VELESTO (OP; TP: RM0.16) (from pick-up in demand for
jack-up drilling rigs).
Meanwhile, globally, 2023 is expected to see a further ramp-up in offshore exploration and production (E&P)
capex, especially from 2020-2022 levels, as an aftermath of under-investments in the industry over the past
several years. All three of our Bursa-listed FPSO players, i.e. YINSON (OP; TP: RM3.15), MISC (MP; TP:
RM7.30), and ARMADA, have been actively participating in international job bids, with opportunities
emerging from Latin America, Asia Pacific and Africa. The FPSO space is starting to see a supply squeeze –
i.e., 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.

Petronas Yearly Capex (RM bil)

70 120%
64.6 64.7
60.0
60 56.6 100%

50.5
50 46.8 47.8
45.6 44.5
44.0 80%

40 37.6 37.1
34.9
33.4 60%
30.5
30

40%
20

20%
10

0 0%
RM bil
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022F

Source: Petronas, Kenanga Research

Petronas Yearly Dividends (RM bil)

60
54
50
50

40
34 35
30 30 30 30
RM'bil

29 29
30 26 27 26
24 25

20 18
16 16
11
10

0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022F2023F

Source: Petronas, Kenanga Research

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Oil & Gas Sector Update
05 January 2023

Global Offshore E&P Capex Spending / Global Floater Project Awards

Source: IHS Markit, MISC

Sector valuations still yet to fully reflect fundamental recovery. We believe valuations for the overall
sector in general have still yet to fully reflect the underlying fundamental recover y. Despite strong oil prices,
the KL Energy index is still far below 2019 levels, and in fact, has been trading at a divergence agains t the
rally of 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.

KL Energy Index versus Brent Crude Oil Price

1400 140

1300
120
1200

1100 100

USD per barrel

Index Points

1000
80
900
60
800

700 40
600
20
500

400 0
Jul-21
Jul-19

Jul-20

May-22
Jul-22
Nov-18

May-19

Nov-19
Jan-20

May-20

Nov-20

May-21

Nov-21

Mar-22

Nov-22
Sep-18

Jan-19
Mar-19

Sep-19

Mar-20

Sep-20

Jan-21
Mar-21

Sep-21

Jan-22

Sep-22

KL Energy Index (LHS) Brent Crude Oil (RHS)

Source: Bloomberg, Kenanga Research

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Oil & Gas Sector Update
05 January 2023

KL Energy Index – Forward PER Valuation

Source: Bloomberg, Kenanga Research

Maintain OVERWEIGHT on the sector, premised on: (i) oil prices remaining elevated at current levels, (ii)
recovery in investment spending and activity levels from oil majors, and (iii) undemanding valuations and
buying opportunities throughout the sector. Our sector top picks are PCHEM and ARMADA.
• We like PCHEM because it is a beneficiary of the elevated crude oil and petrochemical prices. Given its
arrangement with Petronas, PCHEM benefits from a favourable feed-cost structure against peers – i.e.
most of PCHEM’s gas feed stock can be procured from Petronas at a fixed pre-agreed price, while other
players could be hampered by the volatile input cost environment. PCHEM also enjoys dominant market
share regionally, which will be further cemented by the start-up of its Pengerang complex - increasing its
capacity by ~15%. TP is pegged to 11x PER – in-line with other regional petrochemical giants (e.g.
Formosa Chemicals, LG Chem).
• We like ARMADA as it has restored its financial health with its borrowings level becoming more
manageable (net-gearing level has been reduced to 1.0x currently, as compared to 2.4x in end-
FY20). It is currently eyeing expansion and scouting for new jobs. The global FPSO market is
currently tight at the moment, with ample job opportunities but limited competition as many
incumbents are already fully loaded with jobs at hand. Operating in a tight and favourable market, we
believe it is an eventuality for ARMADA to secure its next large-sized FPSO project to act as a re-
rating catalyst for the stock. Our TP is derived from its SoP-valuation, and has yet to factor in any
new contract win assumption.

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Oil & Gas Sector Update
05 January 2023

Peer Table Comparison

PER (x) - Net. Net Div
PBV
Target Core EPS (sen) Core EPS Growth Core ROE (%) Div. Yld
Last Price Upside Market Cap Shariah Current (x)
Name Rating Price Earnings (sen) (%)
(RM) (%) (RM'm) Compliant FYE
(RM) 1-Yr. 2-Yr. 1-Yr. 2-Yr. 1-Yr. 2-Yr. 1-Yr. 1-Yr. 1-Yr. 1-Yr.
Fwd. Fwd. Fwd. Fwd. Fwd. Fwd. Fwd. Fwd. Fwd. Fwd.

Stocks Under Coverage

BUMI ARMADA BHD OP 0.475 0.630 32.63% 2,811.1 N 12/2022 12.4 11.7 7.9% -5.1% 3.8 4.0 0.6 16.8% 0.0 0.0%
DAYANG ENTERPRISE HLDGS BHD OP 1.29 1.70 31.78% 1,493.5 Y 12/2022 10.2 11.2 170.1% 10.1% 12.6 11.5 1.0 8.6% 0.0 0.0%
DIALOG GROUP BHD OP 2.41 3.10 28.63% 13,598.6 Y 06/2023 9.5 9.9 5.1% 4.8% 25.5 24.3 2.5 10.2% 2.8 1.2%
MISC BHD MP 7.25 7.30 0.69% 32,362.2 Y 12/2022 43.1 33.8 1.9% -21.6% 16.8 21.4 0.9 5.6% 33.0 4.6%
PETRONAS CHEMICALS GROUP BHD OP 8.45 11.00 30.18% 67,600.0 Y 12/2022 87.2 68.8 -3.9% -21.1% 9.7 12.3 1.8 19.0% 43.6 5.2%
PETRONAS DAGANGAN BHD MP 22.28 23.90 7.27% 22,134.2 Y 12/2022 70.4 74.0 27.6% 5.2% 31.7 30.1 4.0 12.5% 70.4 3.2%
PETRON MALAYSIA REFINING MP 4.34 4.65 7.14% 1,171.8 Y 12/2022 161.1 98.1 82.8% -39.1% 2.7 4.4 0.5 20.1% 16.0 3.7%
UZMA BHD OP 0.530 0.670 26.42% 186.6 Y 06/2023 6.6 7.3 57.9% 11.4% 8.1 7.2 0.3 4.3% 0.0 0.0%
VELESTO ENERGY BHD OP 0.155 0.160 3.23% 1,273.4 Y 12/2022 (0.7) 1.1 -135.6% 41.3% N.A. 14.7 0.6 -2.8% 0.0 0.0%
WAH SEONG CORP BHD OP 0.640 0.890 39.06% 495.6 Y 12/2022 6.2 9.9 101.7% 60.5% 10.4 6.5 0.8 7.8% 0.0 0.0%
YINSON HOLDINGS BHD OP 2.46 3.15 28.05% 7,122.5 N 01/2023 17.3 18.2 22.1% 5.0% 14.2 13.5 2.6 19.5% 6.0 2.4%
Simple Average 38.5 31.3 30.7% 4.7% 13.5 13.6 1.4 11.1% 1.8%

Source: Kenanga Research

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Oil & Gas Sector Update
05 January 2023

Stock Ratings are defined as follows:

Stock Recommendations

OUTPERFORM : A particular stock’s Expected Total Return is MORE than 10%

MARKET PERFORM : A particular stock’s Expected Total Return is WITHIN the range of -5% to 10%
UNDERPERFORM : A particular stock’s Expected Total Return is LESS than -5%

Sector Recommendations***

OVERWEIGHT : A particular sector’s Expected Total Return is MORE than 10%

NEUTRAL : A particular sector’s Expected Total Return is WITHIN the range of -5% to 10%
UNDERWEIGHT : A particular sector’s Expected Total Return is LESS than -5%

***Sector recommendations are defined based on market capitalisation weighted average expected total
return for stocks under our coverage.

This document has been prepared for general circulation based on information obtained from sources believed to be reliable but we do not
make any representations as to its accuracy or completeness. Any recommendation contained in this document does not have regard to the
specific investment objectives, financial situation and the particular needs of any specific person who may read this document. This
document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees.
Kenanga Investment Bank Berhad accepts no liability whatsoever for any direct or consequential loss arising from any use of this document
or any solicitations of an offer to buy or sell any securities. Kenanga Investment Bank Berhad and its associates, their directors, and/or
employees may have positions in, and may affect transactions in securities mentioned herein from time to time in the open market or
otherwise, and may receive brokerage fees or act as principal or agent in dealings with respect to these companies.

Published by:

KENANGA INVESTMENT BANK BERHAD (15678-H)

Level 17, Kenanga Tower, 237, Jalan Tun Razak, 50400 Kuala Lumpur, Malaysia
Telephone: (603) 2172 0880 Website: www.kenanga.com.my E-mail: research@kenanga.com.my

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