Potential reduction in capital expenditures by national oil company may lead to a downgrade in oil & gas stocks ratings.

(Kuala Lumpur, 8th) Maybank Investment Bank forecasts that with the increasing likelihood of Petroliam Nasional Berhad (Petronas) potentially cutting capital expenditures by 2025, Malaysia's oil & gas industry may face the risk of rating downgrades.

The investment bank stated that the potential cuts in capital expenditures may delay Petroleum Exploration and Production (E&P) projects, consequently leading to a slowdown in Oil & Gas Services and Equipment (OGSE) companies growth.

Therefore, Maybank Investment Bank favors defensive stocks more, especially midstream businesses and Floating Production Storage and Offloading (FPSO) related companies, while advising investors to avoid the petrochemical sector in 2025.

In addition, the investment bank has also lowered the target price-to-earnings ratio of all oil and gas stocks it covers, from the current 12 times to 10 times, which will result in a decrease in target prices for each stock.

In a report on Tuesday, Maybank Investment Bank stated that potential capital expenditure cuts by Petroliam Nasional Berhad (Petronas) may delay upstream exploration and production projects, leading to a slowdown in the growth of OGSE companies.

This phenomenon is related to the transfer of control over Sarawak's natural gas resources from Petroliam Nasional Berhad to Sarawak's Petroleum Company (Petros), impacting the national oil company's revenue sources and free cash flow.

"Although we cannot quantify the impact, we believe that Petroliam Nasional Berhad (Petronas) may postpone capital expenditures as some of its trade revenue may have been lost."

The report points out that the past revenue of local Oil, Gas and Support Services (OGSE) companies has been highly correlated with Petronas' capital expenditure.

"For example, in 2016, 2017, and 2021, the total revenue of OGSE companies showed a consistent downward trend with capital expenditure."

"Based on past observations, we are cautious that many upstream OGSE companies focusing on the local market may face growth slowdown in 2025, or the possibility of needing to adjust growth expectations."

In addition, Maybank's investment banking pointed out that Petronas had previously planned to invest 300 billion ringgit in capital expenditures over the next five years (2023-2027). Given the current situation with Petros, this plan may not be achievable.

Given the latest developments in the industry, Maybank's investment banking is more Bullish on defensive stocks, especially midstream companies and FPSO businesses, which are expected to benefit from the growth in global deepwater and ultra-deepwater capital expenditure investments.

At the same time, the investment bank forecasts the average price of Brent crude oil in 2025 to be $70 per barrel, lower than $80 per barrel in 2024. This is mainly due to oversupply putting downward pressure on prices.

According to the plans of the Organization of the Petroleum Exporting Countries and its allies (OPEC+), crude oil production will increase by 2.2 million barrels per day from April 2025.

The report points out that FPSO systems are expected to drive offshore oil and gas production, with an estimated average of 10 to 11 project awards per year until 2030.

"We believe that the FPSO market is currently in a 'golden age,' with strong global project bidding, and an estimated 60 projects expected to be awarded between 2024 and 2028."

On the other hand, Maybank Investment Bank believes that the average selling price (ASP) in the petrochemical industry has already bottomed out, but the industry appears to be in an L-shaped recovery phase.

"In addition, there will be additional polymer capacity in the region in 2026, making it unlikely for the industry to return to the high ASP levels of the second half of 2021 and 2022."

"We expect the group to experience a year-on-year profit decline in the 2025 fiscal year, as Petrochemical Corporation Malaysia (PPC) incurs an annual loss of over 0.7 billion Ringgit.

Currently, the investment bank has given a "Sell" rating to both Petrochemicals and Lotte Daum Chemicals.