KUALA LUMPUR (Aug 9): Petroleum Sarawak Bhd's (Petros) role as the sole gas aggregator in Sarawak may negatively impact Malaysia's liquid natural gas (LNG) exports, but it is unlikely to disrupt upstream capital expenditure (capex), which could prove a "bad" decision, said BIMB Securities.

"Given that Sarawak may redirect of its gas production towards domestic consumption, we think this may affect the country’s LNG gas export volume. As such, this will negatively affect Petronas’ income from its gas/LNG segment," said the research house in a note on Friday.

Petros has begun its role to fulfill the 10-year Sarawak Gas Roadmap (SGR), which aims to increase the state’s domestic gas consumption to 30% by 2030.

"We think the realisation of SGR would still depend on gas supply security in the long run, regardless of who is the gas aggregator.

"Thus, this requires large investment in the upstream project. Hence, the possibility of Petronas cutting its upstream capex is low, in our view," said BIMB Securities.

As such, the research firm kept its “overweight” recommendation on the oil and gas sector.

"Given the upcycle in upstream capex spending, we favour upstream services companies, especially those involved in greenfield projects," it added.

BIMB Securities' top picks are Malaysia Marine Heavy Engineering Bhd (KL:MHB) with a target price (TP) of 94 sen, Velesto Energy Bhd (KL:VELESTO) with a TP of RM0.34, MISC Bhd (KL:MISC) with a TP of RM10.30, and Hibiscus Petroleum Bhd (KL:HIBISCS) with a TP of RM3.40.

BIMB Securities said while this shift is expected to negatively impact Petronas’ gas/LNG segment income, Petronas Chemicals Group Bhd (KL:PCHEM) could also be affected if there are changes to its favourable gas feedstock price arrangement with Petronas.

BIMB Securities said the Sarawak government will require sustainable investment in the upstream segment, particularly in greenfield projects, to ensure long-term gas supply security.

"From capital allocation point of view, we think that it is a bad decision for Petronas to cut its greenfield upstream capex merely due to lower income from other segment.

"This is even more peculiar given that the economics of greenfield project remain viable amidst higher oil and gas price environment."

BIMB Securities believes the outlook for offshore projects remains positive as long as oil prices stay above US$60-70 per barrel.

This scenario benefits Malaysia Marine Heavy Engineering, the country’s largest fabricator for offshore structures, and Velesto Energy, the sole jack-up rig provider, as drilling projects continue.