KUALA LUMPUR (July 15): Malaysia’s oil and gas sector is expected to recover gradually amid lingering external challenges and company-specific headwinds, said MIDF Research.

The research house expects sector stabilisation to take shape after the second quarter of 2025 (2QCY2025), underpinned by easing trade tensions and a de-escalation of geopolitical conflicts.

“Oil and gas prices will remain a determining factor in the local oil and gas players for the upcoming 2QCY2025 earnings season,” MIDF said, while maintaining a “neutral” stance on the sector.

The Bursa Malaysia Energy Index, which tracks 31 stocks in the sector, has lost almost 10% since the year began, in line with the softening oil prices. Brent, the global benchmark for crude oil, has dipped more than 7%.

MIDF said midstream players are the main beneficiaries of lower crude oil prices and are expected to benefit from improved refinery margins and increased storage demand.

Liquefied natural gas demand, driven by energy transition, energy security, and power generation for data centres, is expected to support the sector and boost midstream operations through storage and transportation.

As such, local midstream firms are likely to post stronger earnings in 2QCY2025. Unlike upstream and downstream segments, midstream players rely on long-term, volume-based contracts, providing stability amid commodity price fluctuations.

In line with this, MIDF has named Dialog Group Bhd (KL:DIALOG) as its top pick, upgrading the stock to “buy” with a target price of RM1.85.

In contrast, volatile prices may prompt major oil players, notably those that are upstream, to prioritise cost optimisation, risking new contracts for oil and gas services and equipment (OGSE), production storage and offloading, offshore support vessels, and exploration and production (E&P), leading to reduced earnings forecasts.

MIDF noted that E&P players remain more vulnerable to price pressures despite higher production in 2QCY2025, as their earnings are closely tied to oil and gas prices. 

Offshore projects are likely to be few, as rising supplies from Opec+ and efforts by the US and Europe to rebuild oil inventories are anticipated to boost long-term production. Nevertheless, ongoing long-term contracts and Petronas’ continued domestic investments are expected to provide a partial buffer against external pressures on OGSE players, the research house noted.