Analysis: Sarawak still a key strategic area for Petronas

KUCHING (Oct 3): Amidst ongoing discussions between Petronas and Sarawak over the state’s gas distribution, Petronas has emphasised that both parties remain strategic partners in the development of hydrocarbon resources.

An analysis by Kenanga Investment Bank Bhd (Kenanga Research) believes that Petronas will redirect more of its capex budget into the domestic market, which has been under-invested in the last five years, to prevent a steep natural production decline in Malaysia.

“Therefore, we expect upstream capex in Sarawak’s offshore areas to remain intact in the longer term, although slight delays may occur in the short term as the details of the agreement are still being finalised,” it said.

“In our view, this would be a short-term hiccup for upstream service providers in Malaysia and they remain in a favourable position in the domestic upstream market due to the tightening availability of contractors, and we anticipate a ramp-up in activities in 2025 overall.”

Petronas is disciplined on capex spending but with head-room for domestic spending.

It has maintained a cautious approach to spending amid macroeconomic uncertainties, committing to preserving value through cost rationalisation and value-focused investments.

With its operating cash flows intact and an approved dividend of RM32 billion for FY24 (compared to RM40 billion in FY23), Kenanga Research believed the group can still ramp up its domestic investments, even if it underspends on its RM60 billion annual capex target.

“The new energy capex is expected to remain manageable at 18 per cent, while foreign capex, particularly for the Canada LNG project, is expected to enter its final phase by the end of FY24.

“According to previous reports, the Canada LNG project will generate cash flows in 2025.”

The upstream services market, particularly maintenance and hook-up and commissioning (HUC) services, experienced a significant increase in activities in 2024 and we expect this trend to continue in 2025.

“The Pan Malaysia umbrella contract worth up to RM10 billion with a duration up to a total of 10 years could be up for grabs before the end of 2024 as Petronas and other oil producers look to award the next cycle of major upstream maintenance jobs which have been delayed for two years already.

“Hence, we believe that the new cycle of contract could be awarded and if not, Petronas will award another year of contract extension with favourable contract terms, both still a boon to upstream maintenance activities and margins.”