KUALA LUMPUR (March 11): MIDF Research has upgraded the oil and gas sector to "positive" as it sees the upstream and downstream sub-segments will benefit from the recent oil price rally.

Its analyst Noor Athila Mohd Razali said in a note today that the higher oil prices would benefit the sub-segments in terms of potential new contract awards, rising product prices and spread for downstream industry players.

“Despite the absence of revision in exploration and production (E&P) capital expenditure spending from the oil majors, we opine that the recovery narrative for the sector remains on track given that a more selected spending approach will result in a more sustained recovery and significant uptick in activities within the oil and gas sector is expected to take place in the second half of 2021.

“Hence, we believe that the upgrade on the sector to 'positive' is timely given that we are expecting the oil and gas players to register stronger year-over-year earnings growth in FY21 after a series of commendable earnings recovery recorded from 3QFY20 onwards,” she said.

Noor Athila added that the upgrade was also in line with her raised crude oil price forecast of US$58 per barrel in 2021, from US$51 per barrel prior.

She also noted that while Petronas has remained committed to ensuring sustained offshore activities for local oil and gas players, it is taking a cautious stance amid the persistent uncertainty and sluggish recovery in demand caused by the Covid-19 pandemic.

“That said, we are reassured of the Malaysian oil and gas recovery trajectory given that Petronas is now expected to increase its E&P spending in 2021 to possibly RM40 billion to RM45 billion. This is as opposed to the RM33 billion that it has spent in 2020,” she added.

She also reiterated that she continued to favour companies that have been weathering the current pandemic successfully and coming out of it with minimal dent.

Noor Athila continued to recommend companies with strong fundamentals, stable recurring income, good business segmentation, and well-diversified revenue, such as Dialog Group Bhd (buy, target price: RM4.30), Serba Dinamik Holdings Bhd (NR) and Gas Malaysia Bhd (buy, TP: RM3.22).

For companies that are proxies to the movement in oil price, she recommended Sapura Energy Bhd (buy, TP: 16 sen) and Malaysia Marine and Heavy Engineering Holdings Bhd (trading buy, TP: 49 sen) as these companies are expected to benefit from increased E&P spending from oil majors and national oil companies should oil price continues to recover.

In terms of dividend play, she recommended Favelle Favco Bhd (buy, TP: RM3) and Petronas Gas Bhd (buy, TP:RM17.90) as these companies have been registering not only stable recurring income but also consistent dividend payout for the past three years.

Meanwhile, her top ESG pick within the sector would be Petronas Chemicals Group Bhd (buy, TP: RM8.03) and Petronas Gas Bhd (buy, TP: RM17.90) given the parent company’s commitment to reaching zero-carbon emission by 2025 and various other internal ESG-driven initiatives.

She also likes Gas Malaysia Bhd (buy, TP: RM3.22) for providing cleaner energy alternatives such as natural gas to businesses nationwide and its potential to become the replacement for coal-powered plants in the near future following the upcoming expiration of the current power purchase agreements in 2023.