HLIB maintains overweight on oil and gas, naming Dialog, Armada, Velesto as top picks

KUALA LUMPUR (July 2): Hong Leong Investment Bank (HLIB) Research has maintained its “overweight” rating on the oil and gas sector, keeping its average Brent crude oil price forecast unchanged at US$85 (RM400.96) per barrel (bbl) for 2024/25.

In a sector update released on Tuesday, the research centre said local offshore operations would be in full swing post-monsoon, which would have a positive impact on surface maintenance contractors and fleet owners of offshore support vessels in the coming quarters.

HLIB said the award of pan-Malaysian MCM-HUC packages, the tender for the production operations vessel and the Safina 2 project are key factors influencing the valuation change.

“With oil prices remaining above $80 per barrel, we expect the drilling and FPSO (floating production, storage and offloading) markets to remain tight as E&P (exploration and production) activity picks up around the world.

“Our top picks for this sector include Dialog Group Bhd (KL:DIALOG) (‘Buy’; TP (Target Price): RM3.00), Bumi Armada Bhd (KL:ARMADA) (‘Buy’; TP: 78 sen) and Velesto Energy Bhd (KL:VELESTO) (‘Buy’; TP: 35 sen),” it said in a statement.

HLIB said the impact on Velesto’s earnings is relatively small, at least in the near term, due to solid upstream capital investment by major Southeast Asian oil producers to support rig demand. Four of the six rigs are under long-term charter agreements with secured rates through to the end of 2025, while the charter agreements for Naga 3 and 5 in fiscal year 2025 are currently being tendered and negotiated.

“The full-year utilisation rate for FY2024 is expected to be 85% (vs FY2023: 83%) as it remains above 90% in Q2 2024, but the relatively lower fleet utilisation in H2 2024 is due to the Special Periodic Survey (SPS) scheduled for Q3 2024 for Naga 2 and 5 and Q4 2024 for Naga 3 and 6,” the release reads.

HLIB said a number of FPSO projects are expected in South America and Africa between 2024 and 2028, adding that MISC Bhd (KL:MISC) and Yinson Holdings Bhd (KL:YINSON) are interested in some of these projects.

The research house said MISC’s flagship Mero-3 FPSO has been largely de-risked after it sailed offshore from Brazil, pending the completion of a majority stake sale to recycle capital. In the meantime, Yinson recently completed the Atlanta and Maria Quitéria FPSOs — preserving both of their potential to bid for major orders, in addition to a few smaller opportunities in Southeast Asia (i.e. Kelidang Cluster and Salam-Patawali Sarawak, HLIB added).