KUALA LUMPUR: MIDF Research believes oil and gas services equipment (OGSE) companies will perform better in the second quarter of financial year 2024 (2QFY24) with strong oil and gas prices.
It said with guidance from the 2QFY24 earnings result of oil and gas players in the US and Europe, it anticipates upstream OGSE companies to perform as well as in the 1QFY24 earnings season.
MIDF Research said this is in line with the higher Brent crude price in second quarter of 2023 at US$85.03 per barrel (pb) (+3.8% quarter-on-quarter).
It said given that Malaysia has nearly 2,300 OGSE companies, it expects the OGSE subindustry to report improved performance for the 1HFY24.
"We believe the upstream division would remain resilient given the higher capital expenditure (capex) (global capex up by +24%year-on-year (yoy) to US$600 billion; Malaysia capex up by +23.3 per cent yoy to RM31.2 billion in current year 2024) and the Brent crude oil prices to remain relatively stable and elevated," it said.
MIDF Research said immediate downside risks are sudden escalation in geopolitical tensions; drastic changes to Organisation of the Petroleum Exporting Countries (OPEC)+ supply cut, and unfavourable MYR/USD exchange rates.
MIDF Research forecasts Brent to reach an average of US$82pb.
It has a positive outlook on the oil and gas (O&G) sector as the overall prospects for the sector in 2024 remains encouraging.
However, the firm will closely monitor any escalations of geopolitical tensions, major OPEC+ production changes and the Federal Reserve's (Fed) monetary policy.
MIDF Research is highly optimistic on the upstream division, given that its contractual work basis gives its operations more stability despite a slip of Brent crude oil to a maximum threshold of 20-25 per cent below current spot price.
This is on top of Petroliam Nasional Bhd's (Petronas) expected capital expenditure (capex) of RM50 billion to RM60 billion in 2024.
However, the firm noted that the short-term downside risk is on the uncertainty in the demand for crude oil, geopolitical risks and OPEC+ decision in its production cuts following the drop in Brent crude oil daily spot price below US$80 per barrel since the last week of July 2024.
Similarly, the firm is also positive on the trajectory of the midstream, notably on the ship tankers and storage farms, following a relatively stable and elevated short-term and long-term charter rates for most ship sizes.
"Meanwhile, the slip in both crude oil and natural gas prices in the final week of July 2024 would bode well for tankers to mobilise and store crude and refined petroleum products as sellers could mitigate the cost of charters while buyers could restock in higher volume."
"While we are generally neutral on the downstream, we continue to anticipate the recovery in petrochemicals as well as the increase in demand for biofuels and renewable energy," it said.
MIDF Research has MISC Bhd as its 'top pick' for the O&G sector, given its well-established status as a maritime industry player for offshore services and diversified portfolio within the upstream and midstream businesses.
The firm said the group has an international reach with its floating production storage and offloading (FPSOs) and tankers, as well as a consistent dividend payment.
It added that MISC's initiatives in sustainable maritime solutions and carbon solutions including carbon capture and storage (CCS) are also admirable and crucial to its ESG score.
"In the coming months, we are expecting a stronger demand for FPSOs and tankers in tandem with the growth in the upstream division, on the back of elevated Brent crude oil price and higher demand for petroleum products, regionally and locally."
"However, the downside risks remain to be uncertainties in geopolitical conflicts, drastic changes in the economy, and continuously lower demand for crude oil from China," it said.