UOB Kay Hian
Report Date: 30 June 2025

Malaysia Oil & Gas Sector 2025: Industry Consolidation, Energy Transition, and Top Stock Picks in the Age of Electricity

Overview: Navigating the “Age of Electricity” and Polycrisis in Malaysia’s Oil & Gas Sector

2025 is shaping up as a transformative year for Malaysia’s oil and gas (O&G) sector. Industry consolidation, new geopolitical risks, energy transition pressures, and Petronas’ ongoing right-sizing are reshaping the investment landscape. As global focus intensifies on electricity-driven investments—artificial intelligence, data centers, and grid/battery upgrades—the local O&G ecosystem is experiencing fundamental changes. The sector outlook is downgraded to MARKET WEIGHT, balancing near-term oil price optimism against structural and execution risks.

Brent Oil Price Outlook: War Premiums and Profit-Taking in Focus

• Brent oil price forecasts for 2H25/1H26 have been raised to US\$80/bbl and US\$70/bbl, respectively, incorporating a US\$15-20/bbl war premium due to heightened geopolitical tensions in the Middle East.
• Consensus forecasts remain lower, with Bloomberg at US\$67-65/bbl and EIA at US\$62-60/bbl for 2H25/1H26. Only one forecaster expects 2H25 Brent as high as US\$80/bbl.
• Base case scenario (70% probability): US\$70-80/bbl on gradual diplomatic de-escalation.
• Escalation (20%): US\$90/bbl if Iran targets regional or US assets in the Middle East.
• Worst case (10%): >US\$100/bbl if the Straits of Hormuz are severely blocked.
• Markets are betting on no major trade route disruptions and assume the Israel-Iran-Gaza conflict will not persist beyond 2025, allowing for profit-taking as prices decline towards year-end.

Industry Consolidation and the Petronas-Petros Polycrisis

The sector faces continued consolidation amid a “polycrisis,” driven by both global and local factors:

• Petronas’ right-sizing and reduced transparency complicate project and procurement visibility.
• The Petronas-Petros local geopolitical dispute is now considered a permanent sector risk, with ongoing court cases and unresolved legal issues impacting sector stability.
• Energy transition imperatives, including carbon capture and storage (CCS), are demanding significant investments and may dilute sector returns and margins.
• Quarterly reviews of non-O&G ventures will be a recurring feature as the transition accelerates.

Investment Strategy and Stock Recommendations: Riding the Near-Term Oil Price Upside

Given the sector downgrade to MARKET WEIGHT, investors are encouraged to capitalize on near-term oil price strength and consider profit-taking by 4Q25. Select stocks with strong oil price correlations are preferred for short-term momentum, with a wait-and-see approach recommended for 2026 due to lingering sector uncertainties.

Top Picks and Thematic Exposure

• Dialog Group (BUY, Target: RM2.95): Positioned for downstream earnings recovery, with potential catalysts from new storage projects (ChemOne, Biorefinery). Long-term value hinges on upstream asset maturity.
• Yinson Holdings (BUY, Target: RM3.15): Favored among FPSO peers, with rerating potential for FPSO Helang. Investors are advised to monitor restructuring progress in non-O&G businesses before taking long-term positions.
• MISC (BUY, Target: RM10.10): Key beneficiary of CCS/gas logistics themes.
• MMHE (BUY, Target: RM0.70): Attractive for CCS project exposure.
• Sapura Energy: Turnaround play with potential PN17 upliftment on an FY27 horizon.
• Petronas Dagangan: Aligned to clean energy via Sustainable Aviation Fuel (SAF) and Used Cooking Oil (UCO) businesses.
• Hibiscus Petroleum, Petra Energy: High oil price leverage.
• Deleum, Uzma, Wasco: Niche exposure to power, AI, clean energy, and separate IPO themes.

Peer Comparison: Financial Metrics of Key Listed Companies

Local Geopolitical Risk: Petronas vs. Petros and Sector Uncertainties

• Sector was upgraded to OVERWEIGHT in 1H25 on expectations of recovery post-Petronas-Petros dispute, but ongoing legal battles and an interim injunction for Shell MDS highlight persistent risks.
• Sarawak is pushing for greater autonomy, citing constitutional guarantees and seeking exclusion from federal energy laws. Next key court hearing is slated for 25-26 August 2025.

Energy Transition: Clean Energy Investment and Malaysia’s Strategic Advantages

• Clean energy will account for over 70% of the US\$3.3 trillion global energy investment in 2025.
• Malaysia’s abundant depleted offshore reservoirs make it a natural hub for carbon capture and storage (CCS).
• As a major palm oil producer, Malaysia is also positioned as a key global player in Used Cooking Oil (UCO) and Sustainable Aviation Fuel (SAF) supply chains.
• Delays in implementing key policies (National CCUS Bill, National Gas Roadmap) could slow the country’s energy transition progress.

CCS: The Next Growth Engine and Policy Readiness Concerns

• Petronas has invested up to RM5 billion in CCS initiatives, targeting a minimum capacity of 80 million tonnes/year, though Japan’s demand alone is 120-200 million tonnes/year.
• 23Tcf of Malaysia’s gas resources require CCS, but full-scale CCS projects may cost up to RM4.7 billion and remain a long-term earnings driver—immediate contributions are limited to the Kasawari gas project.
• Petronas’ EBITDA is forecast to decline from RM114b to RM100m-110m, with free cash flow possibly turning negative as high dividends and capex persist.
• Policy readiness and the risk of increased competition (especially from Sarawak’s early moves to establish independent carbon storage legislation) are key concerns.

Legal and Regulatory Developments: The Petronas-Petros Case

• Sarawak challenges Petronas over bank guarantees, operating licenses, and contractual obligations, emphasizing state rights under the 1963 Borneo States Legislative Powers.
• Other key issues include Sarawak’s exclusion from federal energy laws and the 2021 exemption of gas distribution from the Petroleum Development Act.
• Winners for three offshore carbon storage sites in Sarawak are expected to be announced by end-2Q25.

Breakdown of 2025 Energy Investments (US\$b)

Sector Execution Risks: 2025 Earnings and Manpower Challenges

• 1Q25 saw sector core profits plunge 53% year-on-year, with earnings misses at Bumi Armada, Dayang, Dialog, and Yinson. Project timelines, such as PTTEP’s Lang Lebah, have been delayed by the Petronas-Petros dispute.
• 2Q25 is expected to be execution-risk-heavy, especially for maintenance players, due to skilled manpower shortages. Petronas estimates 2Q26 and 1Q27 as peak manpower periods (25,000 workers); 2Q25 will require around 15,000 workers, focused in Sabah, Sarawak, Labuan, and Kertih.

Conclusion: Navigating Risks and Opportunities in Malaysia’s Oil & Gas Sector

Malaysia’s O&G sector in 2025 is marked by short-term oil price upside, persistent geopolitical and execution risks, and a strategic pivot toward clean energy and CCS. Investors should focus on near-term oil price plays and select structural winners while monitoring sector consolidation and the evolving policy landscape. Top picks include Dialog Group and Yinson Holdings, with MISC, MMHE, and Petronas Dagangan offering thematic exposure to CCS and clean energy. The sector’s long-term prospects hinge on resolving regulatory uncertainties and successfully managing the energy transition.