AmInvest Research Reports

Author: AmInvest   |   Latest post: Thu, 2 Apr 2020, 8:57 AM


Oil & Gas-Sector - Petronas’ lower dividends belie rising capex cycle

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Investment Highlights

  • Petronas’ 4Q2019 core earnings down 16% QoQ. Excluding impairments of RM4.9bil, Petroliam Nasional’s (Petronas) 4Q2019 core net profit dropped 16% QoQ to RM7.1bil due to lower crude oil prices as Brent fell 9% to US$64/barrel, an 8% rise in operating costs, 35% increase in depreciation, 84% increase in finance cost and 41 percentage-point surge in effective tax rate to 58%, partly offset by a 23% increase in crude production following statutory turnaround activities in 3Q2019.
  • Full-year 2019 core net profit down by 8% YoY. The upstream segment, which now accounts for 16% of group revenue but 53% of its profit after tax (PAT) for 2019, was largely impacted by the 9% YoY decrease in average crude oil prices to US$64/barrel. This largely caused the group’s 2019 core net profit to contract by 8% YoY to RM40bil, excluding impairments of RM7bil.
  • Capex spending rebounded by 44% QoQ. Petronas’ 4Q2019 capex rebounded by 44% QoQ to RM19bil largely from upstream projects against the backdrop of the dwindling tail-end development of the US$27bil Pengerang Integrated Complex (PIC) in Johor, which has reached a completion stage of 99.8%. However, international spending has accelerated at a faster pace, which led to the proportion of overseas projects rising to 48% in 2019 from 46% in 2018. Nevertheless, 4Q2019 domestic spending regained momentum, rising 54% QoQ and 23% YoY to RM9.3bil, which supports our view of a gradually rising capex trend. This is underpinned by Petronas’ 2019–2021 Activity Outlook, which projects a gradual improvement in the utilisation of rigs, vessels, pipeline/offshore installations next year. Given that 2019 capex has stabilised with a slight 2% YoY rise to RM47.8bil, we expect a continuation of the upward momentum this year.
  • Malaysia’s 2019 contract awards slid 6% YoY to RM11.5bil following a lull in 1Q2019 and slower pace in 4Q2019, which registered declines of 35% QoQ and 46% YoY. We view this as the remaining fallout from the 2015-2017 award cycle dislocation. Over the medium to longer term, offshore projects in Brazil, Mexico, the Middle East and West Africa are poised to gain traction with Sapura Energy and MMHE being selected for Saudi Aramco’s Long Term Agreement programme, which allows them to bid for the kingdom’s massive offshore projects that could reach US$150bil over the next 10 years. Westwood Global Energy Group is projecting global drilling and well services expenditure to grow 19% to US$1.9tril for 2019–2023 from 2014–2018.
  • Lower dividends declared so far for 2019. Petronas has declared a 2019 dividend of only RM24bil vs. RM64bil in 2018, which materialised under the newly appointed Pakatan government. As a comparison, the group’s dividends were only RM19bil in 2017. We are of the view that Petronas may be conserving its cash for further upstream capex required to arrest its natural production decline together with potential renewable and gas investments.
  • Maintain our 2020–2021 crude oil forecast of US$60–US$65/barrel. With the impact of the Wuhan coronavirus (Covid- 19) pandemic still uncertain, the potential dampening of global oil demand has driven Brent crude oil prices below US$60/barrel, while US oil inventories has climbed 3% since the beginning of the year to 443mil barrels. Nevertheless, we maintain our 2020–2021 crude oil forecast of US$60-65/barrel with Opec and its partners likely to retain their production quota reduction of 2.1mil barrels this year. As a comparison, the EIA’s Short-Term Energy Outlook is projecting oil prices at US$61/barrel for 2020 and US$67/barrel for 2021.
  • We maintain OVERWEIGHT on the sector as prospects remain bright with rising asset utilisation globally which supports service providers’ improving earnings. Our base-case scenario assumes that the Covid-19 pandemic will not have a prolonged impact on crude oil prices and global demand.
  • Prefer stocks with recurring income profile. While we have BUY calls for Sapura Energy and Velesto Energy, our top picks are still companies with stable and recurring earnings such as Serba Dinamik and Dialog Group. We like the recurring income business model of Dialog and Serba Dinamik, which are involved in operation and maintenance services while Dialog’s earnings visibility is further secured by the Pengerang Deepwater Terminal project with its enlarged buffer zone. For Sapura Energy, we have lowered its fair value to RM0.34, pegged to a FY22F PE multiple of 20x from 30x previously.

Source: AmInvest Research - 27 Feb 2020

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