KUALA LUMPUR (April 8): Less than a month after predicting strong earnings and a potential recovery in oil and gas demand, Kenanga Research changed its outlook due to a worse-than-expected US tariff announcement, which will delay a recovery in sector valuations.

“As the oil and gas sector is highly sensitive to global macro volatility, we recommend investors adopt a more cautious stance and avoid the majority of names within the sector for the time being,” the firm said in its note on Tuesday.

It advised investors to watch for changes in the global economy in the coming months though, as the sector's strong balance sheets suggest that any recovery could happen faster than the post-Covid-19 period.

Kenanga Research now expects recovery in the downstream sector to take longer than expected, possibly beyond 2025, while flagging an uncertain outlook for the upstream services sector in the near term.

It said it has become more bearish downstream due to recession risks and expectations of a slower petrochemical price recovery.

While upstream services earnings are stable for 2025, weaker oil prices may lead to reduced or delayed work orders, increasing earnings risks and suggesting that the sector should trade at lower multiples.

That said it remains positive on hook-up and commissioning, and maintenance, construction and modification companies, as well as offshore support vessel providers specialising in accommodation workboats, due to more stable demand in a lower oil price environment.

Kenanga Research downgraded the sector from "overweight" to "neutral", noting that a recovery in stock prices may be unlikely until the effects of tariffs and economic uncertainties clear up.

The firm lowered its Brent crude oil price forecast to US$64 per barrel for 2025 (down from US$77) and US$67 per barrel for 2026 (down from US$74), due to weaker-than-expected demand and continued production increases from Opec+.

“As a result we expect upstream activity levels in 2025 to be slightly weaker compared with 2024 and the downgrade in its target valuation multiples is to reflect the increased near-to-medium earnings uncertainty,” it said in the note.

For upstream services, given the less optimistic outlook, the preferred choice is Keyfield International Bhd (KL:KEYFIELD), because its younger fleet is expected to recover faster in earnings if the market improves.

It also changed its sector pick from Petronas Chemicals Group Bhd (KL:PCHEM) to Dialog Group Bhd (KL:DIALOG) on account of a protracted recovery for the petrochemical market in the face of tariffs.

Dialog is now the top choice because it performs well during downturns and is attractively priced below its book value.

Kenanga Research lowered the price-to-earnings ratio of six out of seven of the companies it featured in its report, reflecting its more cautious stance on the sector.

The six are Petronas Chemical, Dayang Enterprise Holdings Bhd (KL:DAYANG), Keyfield, Wasco Bhd (KL:WASCO) and Velesto Energy Bhd (KL:VELESTO). Petronas Dagangan Bhd's (KL:PETDAG) price-to-earnings multiples remain unchanged because Kenanga Research thinks the market has already accounted for a very weak growth outlook.