KUALA LUMPUR: Petroliam Nasional Bhd's (Petronas) capital expenditure (capex) is expected to gradually ramp up in the coming quarters to total RM60 billion by the end of 2024, said Hong Leong Investment Bank Bhd (HLIB).
The investment bank said the oil and gas company's first quarter ended March 31, 2024 (1Q24) capex amounted to RM10.7 billion versus RM10.4 billion in 1Q23.
"As usual, Petronas allocated the lion's share of its spending upstream (64 per cent) driven by investments in Argentina, Brazil, and Iraq.
"However, clean energy solutions and decarbonisation projects made up only 10 per cent of its total capex (2023: 16 per cent), falling short of its 20 per cent target per annum so far.
"Meanwhile, domestic capex rose 20 per cent year-on-year (YoY) to RM5.5 billion, primarily for the near-shore floating liquefied natural gas (LNG) project in Sabah and CO2 sequestration facilities in Sarawak.
"We expect domestic capex to stay robust and supportive of the local oil and gas services and equipment (OGSE) sector as offshore production and maintenance activities pick up post-monsoon season," it said in a note.
HLIB also deemed the anticipated decline in dividends a positive as it provides Petronas with greater headroom to spend on capex, potentially benefiting the local OGSE players.
Petronas dished out RM40 billion in dividends to the Malaysian government in 2023, compared to RM50 billion in 2022, and is expected to payout RM32 billion in 2024.
The group's net cash position edged up to RM98.2 billion versus RM96.9 billion as of December 2023.
On that note, HLIB said it maintains an "overweight" call on the O&G sector, premised on elevated oil prices supported by continued production cuts from OPEC+, heightened geopolitical tensions, as well as slowing oil production growth.
With the price of oil hovering above US$80 per barrel, the firm believes it bodes well for local OGSE players in view of buoyant upstream activities around the globe coupled with Petronas capex drive to sustain local production.
Its top picks for the sector include Dialog Group Bhd due to expected sequential earnings growth in the coming quarters driven by the lapse of legacy engineering, procurement, construction, and commissioning (EPCC) contracts and imminent expansion on its midstream tank terminals.
HLIB also favoured Bumi Armada Bhd owing to its undemanding valuation in anticipation of bumper earnings in the FY24 forecast as a contribution from Armada Sterling V sets in, as well as Hibiscus Petroleum Bhd given its strong foothold in upstream O&G production, enabling the stock to fully benefit from a high oil price environment.
The firm has maintained its Brent crude oil forecast at US$85 per barrel for 2024 and 2025.
Moving forward, it said downside risks to its projections include reactivation of spare capacity from OPEC in the near term and higher-than-expected growth from non-OPEC producers like the US and Brazil.
This also includes slower-than-expected oil demand growth from China and India, as well as the de-escalation of geopolitical conflicts