MIDF upgrades O&G sector to 'positive', raises Brent crude target price

KUALA LUMPUR, March 11  -- MIDF Research has upgraded the oil and gas (O&G) sector to “positive” from “neutral” previously following the crude oil demand recovery.

The research house has also revised its 2021 Brent crude target price to US$59 per barrel from  US$51 per barrel previously. (US$1 = RM4.12).

"Following recent developments, we opine that the crude oil price will continue to trade range bound of between US$58 and US$65 per barrel in the first half of of 2021 with supply expected to be actively curbed by deliberate reduction in production of crude oil especially coming from the United States as well as the Organisation of Petroleum Exporting Countries (OPEC)+ alliance," it said in a sector update today.

It said crude demand to be driven by transportation and healthier petrochemical product prices, and they are expected to come in stronger in the second half of 2021 with progress being made in the vaccination front.

“We are upgrading our sector recommendation to ‘positive’ for both upstream and downstream sub-segments given that we anticipate that both sub-segments will benefit from the recent rally in oil price in terms of potential new contract awards following a more palatable oil price as well as; increase in  product prices and spread for the downstream industry players,” MIDF Research said.

The research house said it was reassured of the Malaysian O&G recovery trajectory given that Petronas was now expected to increase its exploration and production (E&P) spending in 2021 to possibly RM40 billion to RM45 billion compared with RM33 billion last year.

Against this backdrop, it said companies with strong fundamentals, stable recurring income, good business segmentation and well-diversified revenue base were its top picks for 2021.

These include Dialog Group with a target price (TP) of RM4.30, Serba Dinamik Holdings (not rated) and Gas Malaysia (TP: RM3.22).

For companies that are proxies to the movement in oil price, it recommended Sapura Energy (TP: RM0.16) and Malaysia Marine and Heavy Engineering (TP: RM0.49).

"These companies are expected to benefit from increased E&P spending from oil majors and national oil companies should oil price continue to recover,” the research house said.

In terms of dividend play, it recommended Favelle Favco (TP: RM3.00) and Petronas Gas (TP: RM17.90), saying that these companies had been recording not only stable recurring income but also consistent dividend payout for the past three years. 

Meanwhile, MIDF Research's top environmental, social, and governance (ESG) picks within the sector are two Petronas companies -- Petronas Chemicals (TP: RM8.03) and Petronas Gas (TP: RM17.90) -- given the parent company’s commitment in reaching zero-carbon emission by 2025 and various other internal ESG-driven initiatives.

“We also like Gas Malaysia (TP: RM3.22) for providing cleaner energy alternative 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,” it added.

-- BERNAMA