KUALA LUMPUR: Kenanga Investment Bank Bhd (Kenanga IB) expects Petroliam Nasional Bhd (Petronas) to maintain its capital expenditure (capex) at RM50 billion or higher in the financial year 2025 (FY2025).

This forecast comes as Petronas continues prioritising funding for production maintenance despite the anticipated decline in Sarawak gas aggregation income, estimated to be no more than RM10 billion.

"While specific details of the gas aggregation agreement remain undisclosed, we believe the Prime Minister Datuk Seri Anwar Ibrahim's announcement aligns with our earlier projection of a potential Petronas capex reduction in the range of RM5 billion to RM10 billion, which is priced by the market with the KL Energy Index selling down by 20 per cent since its peak in June 2024," Kenanga IB said in a note today.

It added that this projected reduction is slightly less severe than what the market may have anticipated.

Kenanga IB noted that in FY2024, Petronas reported a modest 3.0 per cent year-on-year (y-o-y) increase to RM54.2 billion in capex, with upstream and gas and maritime capex rising similarly. Its domestic capex increased 26 per cent y-o-y to RM33.1 billion.

"While this fell short of its previously announced annual target of RM60 billion, it highlights the company's ongoing investment to sustain core operations amid external challenges. Additionally, the group's dividend payment of RM32 billion to the Malaysian government seems sustainable given its RM102 billion operating cash flow in FY2024," it said.

Therefore, Kenanga IB said it remains positive on the upstream services sector but with a more defensive leaning towards maintenance as maintenance work orders require less long-term capital commitment by Petronas. It recommends avoiding higher beta plays like engineering, procurement, construction, and commissioning (EPCC) and drilling and that selective y-o-y growth in hook-up and commissioning (HUC) and maintenance, construction and modification (MCM) will likely drive another strong year for maintenance players like Dayang Enterprise Holdings Bhd.

In addition, offshore support vessel (OSV) demand may moderate downwards slightly but remains supported by a declining fleet supply, while Keyfield International Bhd stands out due to its younger fleet and superior accommodation work barge (AWB) specifications.

It reckons that drilling and EPCC players may see reduced activity in 2025, but a stronger 2026 is possible if Petronas' plans remain on track.

"Given their stronger and more resilient earnings outlook, we adopt a more selective stance on the oil and gas upstream sector, recommending that investors prioritise upstream maintenance-related counters such as OSV players (particularly AWBs) and service providers focused on HUC and MCM," it added.

-- BERNAMA