This article first appeared in The Edge Malaysia Weekly on June 23, 2025 - June 29, 2025

ONCE the darling of stocks among investors, the Malaysian oil and gas (O&G) industry has yet to regain its position after more than a decade. This is despite Brent crude oil prices having been steady for more than two years, leading to many oil majors increasing their capital expenditure (capex).

More activities mean more revenue and profits. But that has yet to translate into meaningful share price movements, with many local O&G service providers trading at single-digit price-earnings ratios (PERs).

This is not unique to only local O&G players. The S&P Global Oil Index — which tracks 120 leading international oil producers — has been flatlining since 2015, with the exception of a sharp dip during the Covid-19 pandemic.

The surge in Brent crude oil prices by almost 14% last week, driven by Israel’s strike on Iran that was followed by a counter-­attack, has brought local O&G companies to life, albeit temporarily.

TA Securities Research reckons that the market would remain sensitive to developments in that region and that any further escalation could push Brent past the psychological level of US$100 per barrel.

This is especially true with the Strait of Hormuz — located between Iran and Oman — being a critical maritime choke point for global energy flows, accounting for about 20% of total oil shipment worldwide.

“The narrow waterway connects the Persian Gulf to global markets and [sees heavy traffic from] oil tankers from major producers such as Saudi Arabia, Iraq, the UAE and, of course, Iran itself. Any disruption — whether physical blockades, missile strikes, drone attacks or the threat of naval mines — could instantly rattle energy markets and induce a geopolitical risk premium in oil prices,” TA Research says in a June 19 report.

Nevertheless, the research house believes that a complete shutdown of the straits is unlikely as it would severely hurt Iran’s own oil export revenue and potentially trigger a multilateral military response.

TA Research remains “neutral” on the local O&G sector as the upside from heightened geopolitical risk is likely to be tempered by several factors, including the spare capacity held by Opec+ (Organization of the Petroleum Exporting Countries Plus) to cushion against supply disruptions, weak global demand for oil and growing supply from non-Opec countries, especially the US, Brazil and Guyana.

While geopolitical risks have always been a tailwind for oil prices, local O&G activities also look buoyant. For example, French energy giant TotalEnergies SE made an announcement last week on the expansion of its upstream portfolio in Malaysia.

TotalEnergies is acquiring a 50% operated working interest in two blocks offshore Sarawak — SK301b and SK313, where gas discoveries exceeding four trillion cubic feet were made — from Petroliam Nasional Bhd (Petronas). The remaining 50% interest is held by the national oil company’s wholly-owned subsidiary, Petronas Carigali Sdn Bhd.

SK301b and SK313 are both expected to be developed to supply gas for Malaysian liquefied natural gas (LNG) from 2030. TotalEnergies chairman and CEO Patrick Pouyanné said the group has established itself as a significant gas producer in Malaysia.

The investment deal was sealed despite rising concerns over the ongoing negotiations between Petronas and Petroleum Sarawak Bhd (Petros) over the rights to develop Sarawak’s hydrocarbon resources, which have caused uncertainties in the O&G industry.

TotalEnergies, alongside Petronas, will also hold interests in several exploration blocks offshore Malaysia and one offshore Indonesia. The transaction is subject to customary conditions, including regulatory approvals, TotalEnergies said.

This acquisition follows TotalEnergies’ acquisition of the remaining 50% stake in SapuraOMV in December 2024. The latest transaction strengthens the group’s position in Southeast Asia with Malaysia as an anchor point, in partnership with Petronas, it added.

SapuraOMV has a stake of 40% in SK408 and 30% in SK310. Both these blocks produce gas offshore Sarawak.

Separately, Japan energy group Eneos’ subsidiary, Eneos Xplora, has signed an agreement with Petronas to extend its production sharing contract (PSC) for Block SK10 offshore Sarawak. This follows a news report last November that Eneos Xplora was looking to invest more than US$648 million (RM2.76 billion) to develop new gas fields in Malaysia.

Meanwhile, the Energy Asia conference last week saw Petronas sign a memorandum of understanding with Italian energy group Eni SpA to set up a 50:50 joint venture (JV) company to develop gas assets in Indonesia and Malaysia.

The proposed JV is expected to deliver up to 500,000 barrels of oil equivalent (boe) per day in sustainable production, about three billion boe of developed reserves and an expected 10 billion boe of exploration potential.

“Asia has huge, huge potential,” Eni CEO Claudio Descalzi told Reuters on the sidelines of the Energy Asia conference.

In addition, several local O&G players are developing marginal fields in Malaysia, with the latest being Dialog Group Bhd (KL:DIALOG). On June 13, the group announced that it has secured a PSC contract for the Mutiara Cluster small field asset located off the coast of Sabah from Petronas. The Mutiara Cluster is the first PSC awarded by Petronas through Malaysia Petroleum Management (MPM) under the Malaysia Bid Round 2025 (MBR 2025), and is expected to achieve first production in 2029.

In February, Petronas announced that there are five exploration blocks offshore under MBR 2025.

This comes after Petronas concluded 14 new PSCs signed under MBR 2024, including MBR+. These involved 12 different operators and encompassed 11 discovered resource opportunities and three exploration blocks.

Looking at these recent developments, local O&G activities are expected to remain robust. This can also be seen in the recent Activity Outlook report, where Petronas outlined its plan to grow and sustain the country’s production of O&G of two million boe per day in 2025 and beyond, supported by projects such as Kasawari, Jerun, Rosmari-Marjoram and Lang Lebah in Sarawak; Gemusut-Kakap Redevelopment and Belud Clusters in Sabah; and Bekok Oil Redevelopment, Tabu Redevelopment and Seligi Redevelopment in Peninsular Malaysia.

Nevertheless, many analysts are exercising caution in the O&G sector as oil majors are expected to lower their capex, Opec policies are anticipated to see changes and first quarter (1Q2025) financial results are forecast to be subdued.

“We downgrade the Malaysia O&G sector to ‘neutral’ from ‘positive’ as local O&G service providers could see lower offshore activities and jobs,” Maybank IB Research says in a June 4 note.

“Our key takeaways from recent O&G company briefings and press releases [are] that regional daily charter rates (DCRs) have peaked due to a higher rig supply as Saudi Arabia had terminated more than 20 rigs amid the capex rationalisation programme by Aramco. This was indicated in Velesto Energy Bhd’s (KL:VELESTO) updated rig schedule and its recent job wins in Vietnam and Indonesia.

“Meanwhile, Keyfield International Bhd’s (KL:KEYFIELD) and Perdana Petroleum Bhd’s (KL:PERDANA) press releases stated ‘subdued offshore activity’ and ‘charter projects were delayed’ in 1Q compared to a year ago, indicating a softer operating environment ahead,” it adds.

Petronas’ Activity Outlook 2025 report indicated that the national oil company’s capex may be further impacted by the development between Petronas and Petros, coupled with lower global crude oil prices, which could deter aggressive capex spending in general.

Maybank IB has lowered its Brent crude oil price assumption to US$67 per barrel in 2025 from US$70. Among its top picks for local O&G players are Dialog and Bumi Armada Bhd (KL:ARMADA) for their recurring cash flow. There are also “buy” calls on Velesto and Yinson Holdings Bhd (KL:YINSON).

The research house says Steel Hawk Bhd (KL:HAWK) could emerge as a “dark horse” for the O&G sector this year, on the back of improving fundamentals via contributions from newly acquired contracts. 

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