KUALA LUMPUR: One analyst believes it is time for investors to get selective on the oil and gas stocks in the upstream segment with an expected softening in drilling rig demand and uncertainties in greenfield capital expenditure by Petroliam Nasional Bhd (Petronas).
Kenanga Investment Bank Bhd Research is recommending a focus on maintenance-driven sector companies such as Dialog Group Bhd, Dayang Enterprise Holdings Bhd and Keyfield International Bhd.
Dialog is preferred given the recovery in the spot tank terminal markets and gradually improving prospects for further expansion in capacities under Pengerang Phase 3; as well as a turn-around in margins for its engineering, procurement, construction and commissioning (EPCC), plant maintenance and specialist product businesses.
Kenanga Research believes Dayang is well-positioned due to its exposure to brownfield maintenance activities in the upstream sector, specifically in hook-up & commissioning and topside maintenance after the recent win in Pan Malaysia contract, with a larger contract value despite less work.
"Its earnings growth will also be boosted by its marine division, which benefits from the booming offshore support vessel (OSV) subsegment," it said.
For Keyfield, Kenanga Research said strategic focus on the maintenance-driven OSV sub-segment positions it to capitalise on sustained demand and limited vessel supply.
The company's prudent fleet expansion, including the acquisition of the vessel Aulia in August 2024, aligns with its growth strategy.
Kenanga Research said Velesto Energy Bhd's guidance for weaker rig utilisation following HESS Corporation contract cancellations suggests a softening in drilling rig demand, though daily charter rates (DCR) remain healthy at US$90,000- 110,000/day.
"Additionally, greenfield capex by Petronas and other producers is unlikely to see material growth given ongoing Petronas-PETROS uncertainties, though we believe the downside has been priced into valuations," it said.
Kenanga Research believes the Malaysian OSV sector, particularly the accomodation work barge segment, remains bullish due to persistent vessel supply tightness from years of underinvestment.
Unlike the drilling market, the local OSV market benefits from a captive structure as the cabotage policy restricts foreign vessels, while Malaysia's requirements for younger fleets (currently allowing vessels age cap of 20 years for tenders (from the cap of 15 years earlier) add to the supply constraints.
With an average fleet age of 14 years, the sector is nearing a critical point for fleet renewal to sustain long-term operational efficiency.
"These dynamics, coupled with strong demand, position the OSV sector for continued growth and robust charter rates. If the demand sustains in the coming years, we might see a pick-up in demand for OSV newbuilds, which could potentially benefit Shin Yang Group Bhd which is not rated by the firm.
Kenanga Research maintains an "Overweight" call on upstream service providers and midstream players due to a favourable macro-outlook.