In a swift pivot from its earlier view, Kenanga Research has adopted a markedly cautious stance on the oil and gas sector, driven by intensified global macro volatility and a disappointing U.S. tariff development that could delay any meaningful rebound in sector valuations. The firm urges investors to tread carefully and largely sideline most oil and gas names as the near-term outlook remains clouded by policy uncertainty and fluctuating demand signals. While acknowledging the sector’s historically robust balance sheets, Kenanga notes that the timing of any recovery could be slower than hoped, particularly for downstream segments where macro headwinds could linger. The research house emphasizes that the downstream recovery is unlikely to regain momentum quickly and may stretch beyond 2025, casting a pall over near-term earnings visibility in several subsectors. At the same time, the upstream services space is seen as carrying an uneven risk-reward profile in the near term, even as some earnings resilience persists through 2025. The firm also points to pricing dynamics, with weaker oil markets potentially translating into softer order inflows and elevated execution risk for project-related activities. Nevertheless, Kenanga remains constructive about certain niches within the broader ecosystem, including hook-up and commissioning, maintenance, construction and modification work, and offshore support vessels that focus on accommodation workboats, where steadier demand is more likely even in a lower-price oil environment. The note signals a reweighting of sector expectations, transitioning from an overweight stance to neutral, as the convergence of tariffs and macro uncertainty curtails the speed and strength of any recovery. In tandem, Kenanga lowered its Brent crude price forecast for 2025 to $64 per barrel (from $77) and 2026 to $67 per barrel (from $74), reflecting softer demand dynamics and ongoing supply adjustments by OPEC+. The revisions are portrayed as a reflection of a more fragile earnings trajectory across the upstream segment, with the need to align valuations with a higher degree of near-to-medium-term uncertainty. Against this backdrop, the research house outlines a more conservative projection for upstream activity in 2025 relative to 2024, underscoring that the peg on earnings multiples has to be adjusted downward to mirror the changed risk environment and the longer path to a full-scale recovery. On the downstream front, Kenanga cites recession risks and a slower-than-anticipated rebound in petrochemical prices as primary catalysts for a more cautious stance, arguing that even with a stable balance sheet backdrop, the sector’s earnings power could be constrained by a weaker macro backdrop and competitive price pressures. Despite these headwinds, the firm remains optimistic about select players and niche segments that could defy broader cycles, particularly those with solid balance sheets, diversified revenue streams, and a track record of resilience during downturns.
Macro Backdrop and Strategic Recalibration
The evolving macro landscape has become the dominant force shaping Kenanga Research’s latest reassessment of the oil and gas sector. In particular, policymakers’ tariff actions in the United States—a development that arrived later than anticipated—are viewed as a meaningful drag on the pace of sector normalization. The tariff environment introduces additional cost pressures and complicates the recovery thesis for companies with exposure to commodity-linked earnings and project-based revenues. Kenanga argues that stocks with higher sensitivity to global macro shifts are likely to underperform until tariff effects and broader economic uncertainties begin to unwind. This creates a bifurcation in the sector: more defensible, cash-generative segments may hold up better, while riskier, cyclical subsectors could suffer from delayed orders and compressed margins. The research house underlines that the oil and gas complex remains highly cyclical, with earnings visibility swinging on macro data, energy price trajectories, and regulatory developments. Given this backdrop, Kenanga urges investors to maintain heightened discipline, favoring companies with resilient balance sheets, clear contract backlogs, and diversified exposure across upstream, midstream, and downstream activities. The emphasis on balance sheet strength is not merely a defensive posture; it is also framed as a potential catalyst for selective upside should macro conditions stabilize sooner than anticipated. The tariff shock, therefore, becomes a clarifying event that helps separate structurally solid entities from those whose earnings streams could be more vulnerable to abrupt shifts in demand or prices. In sum, the macro narrative has shifted from a nascent recovery scenario to a more cautious, data-driven approach that prioritizes risk management and selective exposure within a volatile sector.
Recovery Timing and Sector Heterogeneity
A central theme in Kenanga’s revised view is the uneven pace of recovery across subsectors within oil and gas. The downstream segment, which includes activities downstream of refining and distribution, is expected to experience a slower recovery horizon than previously anticipated. The firm warns that even as balance sheets appear robust in many downstream players, the path to a sustained earnings upcycle is vulnerable to the persistence of macro headwinds and a slower rebound in demand for petrochemical products. The upstream services segment, traditionally a bellwether for capex cycles and project activity, is anticipated to encounter mixed outcomes. While earnings flexibility remains present in 2025 due to existing contracts and the potential for price stabilization in some markets, weaker oil price signals could dampen the pace of new work orders or delay project timelines, thereby heightening near-term earnings risk. Kenanga’s framework suggests that the sector’s overall rebound, if and when it materializes, may occur at a more measured pace, with some pockets of activity leading the way while others lag. This heterogeneity underscores the importance of granular stock-by-stock analysis rather than broad sector bets, as performance will hinge on individual company exposure to derivative price movements, contract type, and backlog quality. The macro environment, therefore, becomes a critical determinant of the sector’s trajectory, influencing not only earnings but also valuation multiples and investment sentiment.
Downstream Outlook: Recovery Delays and Price Dynamics
The outlook for downstream oil and gas activities is now framed as a more extended period of adjustment, with recovery dynamics diverging from the faster pace once anticipated. Kenanga highlights that the downstream segment’s earnings potential is closely tied to a rebound in petrochemicals margins, refinery utilization, and demand for refined products, all of which face competing pressures from global economic soft patches and potential tariff implications on supply chains. The forecast for 2025 presents a notably conservative picture compared with prior projections, with expectations for a more gradual improvement rather than a swift normalization. This shift is driven in part by macro-induced demand softness and the lagged impact of price normalization in the petrochemical cycle, which had previously been a propellant for downstream earnings. The note stresses that even with a stable balance sheet base, the timing of profitability recovery remains susceptible to external shocks, including policy changes and currency volatility, which can compound pricing pressure in the downstream value chain. In the context of dividend yields, cash flow quality, and backlogs, downstream players may exhibit defensive characteristics, but the overall earnings growth profile is likely to be modest in the immediate term. Kenanga thus advises caution among investors who had anticipated a quick rebound, urging a reassessment of risk-reward profiles, and recommending a selective approach to downstream equities based on individual company resilience, contract visibility, and geographic exposure. The downshift in expectations for the downstream segment does not imply uniform gloom across the sector; rather, it calls for discerning selection among earners that can still deliver stable cash generation despite macro uncertainties. The research house also flags potential upside catalysts that could emerge from efficiency improvements, supply chain optimization, and strategic partnerships, which could help certain downstream players outperform when macro conditions stabilize.
Petrochemical Price Recovery and Tariff Impacts
A critical variable in the downstream equation is the pace of petrochemical price recovery. Kenanga notes that a slower rebound in petrochemical prices can chill margins for players exposed to feedstock-linked earnings and specialty chemicals. The tariff environment adds another layer of complexity, potentially suppressing margins through higher import costs or retaliatory pricing pressures, especially for integrated players with raw material exposure sourced from global markets. The combination of a tepid pricing cycle and tariff-induced cost pressures creates a challenging backdrop for downstream earnings growth. In such an environment, the firm argues that stock valuations should reflect heightened uncertainty and potentially more muted earnings multiple compressions, unless companies demonstrate standout cost control, diversified revenue streams, or robust contractual backlogs that can cushion earnings volatility. The net effect is a more prudent stance on downstream equities, where only those with credible path to sustainable earnings growth and favorable risk-adjusted returns will warrant elevated valuations. Investors are thus encouraged to monitor petrochemical price signals, feedstock costs, and tariff developments closely, as these elements collectively determine the risk-reward calculus for downstream assets.
Upstream Services: Earnings Stability Amid Risks
Within upstream services, earnings in 2025 are projected to show relative stability, but the sector is not without its vulnerabilities. Kenanga identifies a tempered outlook for upstream services as weaker oil prices could lead to reduced or deferred work orders, which in turn elevates earnings risk and supports a case for trading at lower multiples than in more robust cycles. The analysis emphasizes that contractors and service providers with diversified client bases, strong project backlogs, and the capability to adapt to a variable price environment stand a better chance of maintaining earnings momentum. Conversely, players that rely on a narrow mix of customers or long-cycle projects may experience more pronounced downside risk if order activity slows or project timing shifts materially. The note indicates that while near-term earnings from upstream services could remain stable on existing contracts and maintenance activities, the upside potential is constrained by the uncertain demand environment and possible delays in capex recovery. As a mitigating factor, Kenanga underscores the importance of operational efficiency, productive capacity management, and prudent capital allocation to preserve margins during periods of volatility. In this context, the research house highlights the potential for selective outperformance among upstream service players that possess younger fleets, modern equipment, and higher utilization rates, which can translate into faster earnings recovery once market conditions improve. The strategy, therefore, centers on balancing exposure to stable revenue streams with a cautious acknowledgment of the risks posed by price volatility and project timing.
Preference within Upstream Services: Keyfield International Bhd
Against this backdrop, Kenanga designates Keyfield International Bhd (KL: KEYFIELD) as the preferred choice within the upstream services segment. The rationale rests on the belief that Keyfield’s younger fleet is well-positioned to realize faster earnings recovery should the market improve, thanks to lower maintenance costs, higher reliability, and superior readiness to capture new work orders. The company’s asset age profile and potential for utilization gains are cited as catalysts that could translate into improved profitability when market demand strengthens. The selection of Keyfield reflects a broader view that younger equipment and agile operational capacity can provide an edge in a slowly improving cycle, particularly for customers seeking efficiency and reduced downtime. Investors are guided to monitor Keyfield’s backlog quality, contract mix, and fleet utilization metrics, as these factors will be critical in determining the speed and extent of earnings upturn in a fluctuating price environment. While Keyfield is highlighted as the top pick among upstream services, Kenanga cautions that the sector’s overall trajectory remains sensitive to oil price movements and macro developments, reinforcing the need for selective exposure and disciplined risk management.
Dialog as a Sector Pick and a Change in Downstream Preference
In the broader sector view, Kenanga reassigns its preferred downstream reference from Petronas Chemicals Group Bhd (KL: PCHEM) to Dialog Group Bhd (KL: DIALOG). The switch is attributed to the protracted recovery for the petrochemical market amidst tariff pressures, as well as the expectation that Dialog’s business model is better positioned to withstand cyclical downturns. Dialog’s capabilities in provision of modular and integrated solutions, along with a track record of stable performance during downturns, are cited as reasons why the company is compelling at current price levels. The note highlights Dialog’s valuation as attractive relative to its book value, suggesting that the stock could offer downside protection and potential upside as the broader cycle gradually improves. This reallocation signals Kenanga’s belief that a company with a robust service and product offering, coupled with prudent capital management and a resilient order book, can weather adverse conditions and outperform peers when macro conditions stabilize. By contrast, the downgrade of the petrochemical-focused PCHEM reflects the more challenging near-term environment for base petrochemicals amid tariff-related headwinds and subdued demand, making Dialog the more compelling option in the near term. Investors are advised to scrutinize Dialog’s project pipeline, tender wins, and margin management, as well as its exposure to key end-markets, to gauge the sustainability of earnings given a slower-than-expected macro recovery.
Petronas Chemicals Group and Other Downstream Players
Kenanga maintains that the market has effectively priced in a weak growth outlook for Petronas Chemicals Group Bhd (KL: PCHEM), which contributes to the decision not to adjust its price-to-earnings multiple for the stock. The reasoning is that PCHEM’s market valuation already reflects the anticipated slower growth trajectory, leaving limited upside unless there is a meaningful improvement in petrochemical demand or a shift in tariffs that materially alters the cost landscape. The firm views the PCHEM case as representative of the broader petrochemical subsegment—one that faces structural headwinds from tariff dynamics, global supply chain disruptions, and a slower recovery in downstream demand. The remaining downstream universe thus becomes a focal point for investors seeking exposure that can offer more defensible earnings streams and more resilient margins under adverse macro scenarios. While Dialog is favored for its defensive characteristics and valuation appeal, other downstream players remain under close watch for signs of stabilization, with particular attention to their exposure to feedstock costs, export markets, and capacity utilization. The overarching message is that downstream profitability in the near term will hinge on the interplay between tariff policy, petrochemical price recovery, and the ability of firms to optimize their cost structures in a slower growth environment.
Valuations, Target Multiples, and Stock-Specific Revisions
Kenanga’s reassessment also encompasses a broad reevaluation of relative valuations across the sector. The firm lowers its price-to-earnings multiples for six of the seven companies highlighted in the report, reflecting a more cautious stance on near-term earnings visibility and the heightened risk premium demanded by investors in a volatile macro setting. The six firms whose multiples were trimmed include Petronas Chemical, Dayang Enterprise Holdings Bhd (KL: DAYANG), Keyfield, Wasco Bhd (KL: WASCO), and Velesto Energy Bhd (KL: VELESTO). The reductions signal a broader attempt to reconcile valuations with the elevated uncertainty surrounding oil prices and project delays. Petronas Dagangan Bhd (KL: PETDAG) stands apart in the valuation framework, with its price-to-earnings multiples left unchanged because Kenanga believes the market has already priced in a very weak growth trajectory for this downstream entity. The valuation stance on PETDAG suggests a differentiation within the downstream space, where some players may still offer reasonable downside protection and capacity to generate reliable cash flows even as the sector as a whole contends with macro headwinds. The selective P/E revisions magnify the importance of granular stock analysis, highlighting the need to factor in company-specific drivers such as backlog depth, contract diversity, fleet age, and exposure to tariff-induced price pressures when constructing an investment thesis in this environment.
Implications for Investors and Stock Selection
For investors, the updated Kenanga framework implies a more selective approach to building exposure in the oil and gas sector. A key implication is to favor companies with robust balance sheets, clear order backlogs, and diversified earnings streams that can mitigate volatility in macro cycles. In particular, the preference for Keyfield International in upstream services and Dialog in downstream reflects a broader strategy to tilt portfolios toward entities with younger assets, efficient operations, and pricing power that can cushion earnings during periods of macro stress. The downgrade of several peers and the maintenance of PETDAG’s valuation underscore the importance of differentiating among stocks based on structural quality rather than relying on sector-wide momentum. Investors are advised to focus on factors such as backlog quality, contract mix, fleet utilization, and exposure to end-market volatility, as well as the potential for cost optimization and disciplined capital allocation to drive shareholder value in an uncertain environment. The tariff scenario adds another layer of consideration, prompting an emphasis on hedging strategies, price risk management, and an assessment of how tariff policy could alter the competitive landscape over the medium term. This nuanced approach aims to identify pockets of resilience while avoiding broad exposure to cyclically sensitive segments that could experience extended downturns.
Stock Picks, Sector Shifts, and Market Impacts
Kenanga’s revised stance also reflects concrete shifts in sector preference and stock-level calls that investors can monitor in the months ahead. The emphasis on Keyfield International Bhd as the preferred upstream services player highlights expectations of faster earnings normalization if the market improves, driven by its younger fleet and favorable utilization dynamics. Dialog Group Bhd’s elevation to the top downstream pick signals confidence in the company’s defensive earnings profile, its ability to deliver steady performance through downturns, and an attractive valuation relative to book value. This strategic tilt embodies the broader theme of prioritizing defensible cash generation and structural quality over simple exposure to oil price dynamics. The six downgrades and the PETDAG valuation stance collectively illustrate how market sentiment may diverge within the same sector, with some firms negotiating a path to earnings resilience while others face more persistent challenges. For investors, this means staying attuned to company-specific catalysts, such as fleet renewal programs, efficiency initiatives, and the capacity to capitalize on any stabilization in crude prices or demand cycles. It also means recognizing that macro factors—in particular tariff policies and global demand shifts—will continue to exert a formative influence on sector performance, potentially creating dispersion in returns across different stock names.
Strategic Takeaways for a Volatile Environment
In light of Kenanga’s updated outlook, investors should consider several strategic approaches when navigating oil and gas equities in a volatile macro landscape. First, emphasize stock-level analysis over broad sector bets, focusing on those with credible backlog visibility and diversified revenue streams. Second, prioritize balance sheet strength and cash flow resilience, as these attributes tend to correlate with sustained performance through cyclical downturns and tariff shocks. Third, monitor fleet age and asset quality in the upstream services space, since newer equipment can offer faster earnings recovery and better utilization in a recovering cycle. Fourth, assess downstream exposure with careful attention to petrochemical price cycles, feedstock costs, and tariff dynamics that could affect profitability. Fifth, maintain discipline in valuation, recognizing that multiple contractions may persist even as some companies approach stabilizing earnings. Finally, stay alert to policy developments and macro indicators that could alter the risk premium embedded in stock prices, enabling timely adjustments to portfolios as conditions evolve.
Operational and Risk Management Considerations
From an operational perspective, firms with strong project delivery capabilities, lean cost structures, and flexible contracting strategies are likely to outperform peers during periods of demand uncertainty. Companies that can adjust capital expenditure quickly, reallocate resources efficiently, and preserve working capital in the face of delayed orders will be better positioned to weather the cycle. Investors should watch for signals such as backlog evolution, tender win rates, and contract renewals, which can offer early indicators of earnings direction. Additionally, regulatory and tariff developments could create a shifting competitive landscape, favoring players with diversified margins or those capable of offsetting tariff impacts through efficiency gains and hedging strategies. The ability to execute maintenance, upgrade, and modification programs efficiently—particularly for offshore support vessels and accommodation workboats—could provide a stabilizing revenue stream that helps soften the impact of slower upstream activity.
Conclusion
Kenanga Research’s latest assessment signals a clear move toward caution in the oil and gas sector amid heightened global macro volatility and tariff-related headwinds. The firm argues that the majority of sector names may be best avoided in the near term, as earnings visibility remains clouded and price recoveries are prone to be slower than originally anticipated. Yet the research also identifies pockets of resilience and selective opportunities within the broader ecosystem. Downstream recovery is expected to be more protracted, potentially extending beyond 2025, while upstream services may offer relative stability but carry earnings risks if oil prices stay weak or project cycles lag. In response, Kenanga downgrades its sector stance from overweight to neutral and revises price targets and valuations downward to reflect increased uncertainty. The highlighted stock moves—Keyfield as the favored upstream services pick and Dialog as the top downstream choice—illustrate a strategy that favors durability, backlogs, and asset quality over broad cyclic exposure. The six P/E reductions and the unchanged PETDAG multiples further emphasize the need for granular stock selection and a prudent approach to risk. For investors, the takeaway is to adopt a selective, fundamentals-driven framework that prioritizes balance sheet strength, contract visibility, and execution capabilities, while remaining vigilant to tariff developments and macro indicators that could redefine sector performance in the months ahead. This approach aims to balance cautious positioning with opportunistic exposure to segments and companies most likely to weather volatility and deliver resilient earnings over the medium term.
