HLIB: Petrochemical sector to see down-cycle from 1H22 - MIDA | Malaysian Investment Development Authority
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HLIB: Petrochemical sector to see down-cycle from 1H22

HLIB: Petrochemical sector to see down-cycle from 1H22

23 Dec 2021

Hong Leong Investment Bank (HLIB) Research expects a down-cycle for the petrochemical sector over the next few years, beginning in 2022.

The research firm said it gathered that the petrochemical super-cycle had somewhat peaked based on its recent analysis of Petronas Chemicals Group Bhd (PetChem) and Lotte Chemical Titan Holding Bhd. 

The firm’s analyst Jeremie Yap said this is due to additional new supply globally, the short-term supply shortage that had been normalising and limited demand growth to absorb new supply amid uneven recoveries globally. 

“However, we should still see strength in earnings over the next one to two quarters for PetChem due to skyrocketing urea prices, which should bolster earnings for the group’s fertiliser and methanol segment,” he said in a note on Thursday (Dec 23).

Meanwhile, Yap expects Petroliam Nasional Bhd’s (Petronas) capital expenditure (capex) spending to be maintained at the RM40 billion to RM45 billion level annually over the next five years, with about 9% of its annual capex allocated to new energy initiatives.

According to him, Petronas has pledged to a net-zero carbon emission goal by 2050, but believes that oil and gas would still form 50% of the world’s energy mix for the next 20 to 30 years.

“Petronas also aims to increase domestic spending to 55% of capex, while the remainder would be for international programmes. 

“We think that indicated capex levels should still be sufficient to help the sector recover in 2022, albeit still lower than its pre-pandemic 2018-2019 levels,” he said. 

HLIB Research maintained its “overweight” call on the sector with its top picks being Bumi Armada Bhd (with a target price [TP] of 84 sen) and Dialog Group Bhd (TP: RM3.38), both with a “buy” call.

The firm likes Bumi Armada given its foothold in the floating production storage and offloading business, which provides steady recurring income, coupled with speedy enhancement of its debt profile.

HLIB Research also likes Dialog for its recurring income type of business model and deems it as one of the only listed secular growth stocks in the local oil and gas space.

Slight oversupply glut expected in 1H22

On a related note, HLIB Research cited that OPEC+ sees an expanding oversupply in global oil markets in early 2022, with a surplus of two million barrels per day (bpd) in January, 3.4 million bpd in February and 3.8 million in March.

This is mainly due to the emergence of the Omicron variant of Covid-19, which seems to be harmful to jet-fuel related demand as it dampens hopes for a speedy recovery in international travel.

“In 2022, non-OPEC supply is projected to see robust growth of three million bpd. This would be backed by an expected gradual increase in drilling and completion activities in the US, increasing output by 600,000 bpd.

“The US and Russia are forecast to contribute two-thirds of total expected growth, followed by Canada, Brazil, Kazakhstan, Norway and Guyuna. 

“Investment in the non-OPEC upstream sector in 2022 is estimated at around US$350 bilion (about RM1.47 trillion), showing a 50% drop compared to the 2014 level,” said Yap.

Notwithstanding that, the firm understands that OPEC+ intends to maintain its stance to gradually increase oil production by 400,000 bpd per month at least until April and to fully phase out cuts by September.

“However, we [also] expect the Omicron variant to only impact demand for jet fuel in the near term due to travel restrictions as the world has come a long way and is now better equipped to manage Covid-19 and related challenges,” added Yap. 

Brent crude oil forecast at US$70-75 per barrel for 2022

Meanwhile, HLIB Research maintained its Brent crude oil forecasts at US$70 to US$75 per barrel for 2022 as the firm believes that OPEC+ is committed to providing a good equilibrium for oil prices. 

The firm viewed that the oversupply in the first half of 2022 (1H22) will be mitigated by increasing demand for oil and gas products due to the reopening of economies globally. 

This is in addition to OPEC+’s programme to gradually increase oil production by 400,000 bpd monthly and to fully phase out cuts by September, which would bolster a stable oil price in the range of US$70 to US$75 per barrel.

Source: The Edge Markets

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