Kenanga Research & Investment

Author: kiasutrader   |   Latest post: Mon, 24 Feb 2020, 11:36 AM


Oil & Gas - Petronas Group’s 4Q18 Results

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Petronas group recorded a better FY18, despite a weaker 4Q18, thanks to improved revenue from higher average realised prices offsetting the strengthening of Ringgit and lower LNG sales volumes, while the poorer 4Q18 performance was dragged by higher costs. Meanwhile, Petronas continues its commitment of higher dividend; declaring dividends of RM54b, of which RM30b is a special dividend. This brings the total dividend declared for FY18 to RM64b, significantly higher than RM19b declared for FY17. We believe Petronas should have the financial capabilities for higher dividend pay-out, tapping into its increased net-cash pile of RM105b (+64% YoY). Petronas has also committed higher capex of >RM50b for 2019 (versus 2018 capex RM46.8b), focusing more on the upstream segment (~RM30b capex, half of which is domestic), and renewable energy. We believe the higher capex could be for currently under-development green fields, as well as recent discoveries, potentially benefiting fabricator players (e.g. MHB, SAPNRG) as well as FPSO players currently bidding for local projects (e.g. MISC, YINSON). Maintain NEUTRAL on the oil and gas sector, favouring stable names such as DIALOG, SERBADK and YINSON as balance sheet resilience and earnings visibility still remain the key selection criterion, although we see a postrestructuring SAPNRG as a possible prime beneficiary of increased upstream oil and gas activities not just domestically, but globally as well.

FY18 rises, despite weaker 4Q18. Petronas Group recorded FY18 core PATAMI of RM43.1b (arrived after excluding net impairments), representing a YoY growth of 11%, helped by higher average realised prices for all key products (2018 average Brent crude price of USD71/barrel, versus USD54/barrel in 2017), offsetting strengthening of Ringgit and lower LNG sales volume. For the individual quarter of 4Q18, core PATAMI plunged 45% YoY, despite stronger revenue from higher average realised prices, due to higher production costs (gross margins slid 4.6 ppt) and higher fixed costs (e.g. depreciation and amortisation, finance costs) following additional capitalisation of assets. Sequentially, 4Q18 core PATAMI came in 31% poorer QoQ, similarly due to the increased fixed costs on top of a higher effective tax rate of 30% vs 24%.

Declares dividends of RM54b, commits to higher capex for 2019. The group remains committed to higher dividend pay-out, having declared a total dividend of RM54b – of which RM30b is a special dividend, all to be paid in 2019. This brings total dividend declared for FY2018 to RM64b, significantly higher than RM19b in FY2017. We believe the increased dividend pay-out should not be overly burdening for the group, with its net-cash pile having jumped 64% to RM105b from a year ago. This comes on the back of its improved cash flows during the year following the better financial results. Meanwhile, the group also guides 2019 capex of >RM50b, higher than the RM46.8b capex spent in 2018. While capex over the last few years were mostly spent on the development of Pengerang Integrated Complex (97% completed as at end-2018), 2019 capex will largely be targeted for the upstream segment and renewable energy. More specifically, the group guides that it would spend roughly RM30b capex for upstream activities in 2019, of which half of it will be spent domestically. We believe these are signs that the group is comfortable with Brent crude prices stabilising at these levels, with the group having budgeted for an average Brent price of USD66/barrel internally.

Possible value-chains to look out. With the upstream segment having been deprived of capex over the recent years from Petronas, we believe the Petronas’ higher capex stance moving forward may be for under-development green fields (e.g. Kelidang, Limbayong fields) and recent discoveries (e.g. recent massive discovery in South Sumatra). We see potential beneficiaries of higher Petronas capex spend to include fabricators (e.g. SAPNRG, MHB) as well as FPSO players bidding for local contracts (e.g. MISC, YINSON). However, we feel that cost optimisation would be a key concern, as we expect to see competitively low margins for upcoming job awards.

Maintain NEUTRAL on the sector. With balance sheet resilience and earnings visibility still key selection criterion for us, we favour more stable names such as DIALOG, SERBADK and YINSON, although we also see a post-restructuring SAPNRG as a potential prime beneficiary of increased oil and gas upstream activities not just domestically, but globally as well. Overall, we believe Brent prices ranging between USD60-70/barrel to be “sensible”, with oil majors comfortable producing at these levels. In fact, we expect to see increased FIDs globally in the coming 1-2 years, spurred by massive new fields in the Middle-east and Africa. From here, we look towards OPEC’s next meeting in April for indications of continued output cut commitments.

Source: Kenanga Research - 11 Mar 2019

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