Kenanga is maintaining its OVERWEIGHT stance on the oil and gas sector after the 3QFY24 earnings came in mixed, with equal numbers of companies under its coverage exceeding and missing expectations, particularly within the upstream services segment, while downstream and midstream companies underperformed.

Notably, the house noted that VELESTO reported stronger-than-expected results but anticipated weaker rig utilisation in FY25 due to changes in the client's plans and the potential influx of Middle Eastern rigs. Consequently, greenfield-related companies face increased uncertainty. However, Kenanga said it remains optimistic about maintenance-focused players, such as those in upstream maintenance and accommodation work barges (AWBs), given the resilient demand in these areas. Additionally, regional demand is expected to bolster activity for upstream services providers amid tight supply conditions. Top picks of the sector, which all turned in in-line quarterly reports, are DIALOG (OP; TP: RM3.37), DAYANG (OP; TP: RM3.80 and KEYFIELD (OP; TP: RM3.18).

3QFY24 results were mixed, with 30% of companies under Kenanga's coverage exceeding expectations and an equal proportion underperforming, compared to 2QFY24 when 50% exceeded expectations and only 11% fell short. Weak macro developments weighed on mid-downstream players such as MISC, PCHEM, and PETRONM, while upstream services counters like ARMADA, VELESTO, and WASCO outperformed on stronger-than-expected profit margins. This underscores the resilience of the upstream services segment amid global macro uncertainties.

As 2025 approaches, the house recommends a more selective approach within the upstream services space, focusing on maintenance-driven sectors. VELESTO's guidance for weaker rig utilisation following HESS contract cancellations suggests a softening in drilling rig demand, though daily charter rates (DCR) remain healthy at USD90,000- 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.

The Malaysian OSV sector, particularly the AWB 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, the house might see a pick-up in demand for OSV new builds, which could potentially benefit SYGROUP (NOT RATED).

The house is keeping its OVERWEIGHT call with the same emphasis placed on upstream service providers and midstream
player due to a favourable macro-outlook. However,  Kenanga said it decided to turn more selective on its picks within the upstream service provider space as certain higher beta sub-segments appear to have shown signs of earnings peaking (for instance jack-up drilling) Post recent sell-down, it believes that the risk-reward is superior in the upstream maintenance space, particularly after recent major awards for the umbrella contracts (5+5).

That aside, in a space with slightly more capex uncertainty than before (possibly due to PETROS and Petronas issue), upstream maintenance still gains priority over greenfield capex-driven jobs (exploration drilling).