Investment Highlights

• Higher costs offset Petronas’ sequentially higher 4Q2018 revenues. Petroliam Nasional’s (Petronas) 4Q2018 net profit slid by 1% QoQ to RM12bil as its 9% increase in revenues, driven by a 15% rise in hydrocarbon output and ringgit depreciation, was more than offset by a 15% climb in operating costs, a 2x increase in financing costs and 5.8ppts hike in effective tax rate to 29.9%. Petronas’ 4Q2018 upstream revenue rose 24% QoQ to RM33bil as daily gas output surged 22% to 1.6mil barrels of oil equivalent (boe) and crude production expanded 5% to 933K boe from a recovery of plant utilisation after statutory turnaround activities in 3Q2018.

• Total capex spending up 5% YoY. Petronas’ 2018 capital expenditure rose 5% YoY to RM46.8bil, driven by a 2.8x surge in spending for international projects while decreasing by 32% for Malaysia as the US$27bil Pengerang Integrated Complex (PIC) in Johor has reached mechanical completion to date. The results breakdown does not show the contributions from the RAPID project, which are likely to be minimal in 4Q2018 as international projects accounted for 63% of the capex, vs. 30% in 3Q2018. Together with a seasonal increase in year-end spending in Malaysia, the 6.4x QoQ increase in overseas spending drove Petronas’ 4Q2018 capex by 3x QoQ to RM20bil.

• Overall capex spending rise further despite missing 2018 guidance. As we had forewarned in our past updates, Petronas’ 2018 capex spending was 15% below Petronas president/CEO Tan Sri Wan Zulkiflee Wan Ariffin’s earlier guidance of RM55bil. As he is now guiding for a capex of “slightly above” RM50bil, we expect the group’s capex spending to catch up as its activity outlook for 2019–2021 has indicated a more robust drilling programme. We note that jack-up rig usage has been revised upwards to 16–18 this year from 7–10 forecasted by the group a year ago in its 2018–2020 outlook. Likewise, Petronas’ 2019 projection for offshore installations has been raised from 6–7 to 8–9.

• FY18 dividend payout ratio of 134%. Although Petronas’s FY18 net profit rose by only 27% to RM47.9bil, its dividends will jump 3.4x YoY to RM64bil for FY18 (vs. RM19bil in 2017), translating to a payout ratio of 134%. This consists of a special tax exempt dividend of RM30bil declared in Nov 2018, which will be progressively paid Jan–Nov 2019. Apart from this, Petronas has already paid RM10bil last year and will be proposing a final tax exempt dividend of RM24bil for FY18. In our view, this payout can be easily managed by Petronas, which registered a 1.6x YoY increase in net cash balance to RM105bil as at 31 Dec 2018.

• Maintain 2019 crude oil forecast at US$65–70/barrel. With US crude inventories up 14% since September last year and Brent crude prices averaging US$61/barrel to date, we maintain 2019 price forecast at US$65–70/barrel. As a comparison, the EIA is projecting US$61/barrel for 2019 and US$62/barrel for 2020, with US daily production projected to increase by 22% since the beginning of 2018 to an all-new record of 12.1mil barrels in February this year. This is almost within reach of the EIA’s forecast of 12.4mil barrels for 2019 and is expected to grow further by 6% to 13.2mil barrels next year.

• Contract awards still on upward trajectory, with Malaysia’s 2018 contract awards rising 54% YoY to RM11.6bil due to the award of Pan Malaysia umbrella contract renewals, Sapura Energy securing the EPCIC work for the Pegaga CPP and Serba Dinamik’s EPC and O&M jobs. Offshore projects in Brazil, Mexico, the Middle East and West Africa may be still poised to gain traction with Sapura 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.

• We are NEUTRAL on the sector given the volatility in oil price direction over the next 6 months, lingering balance sheet risks of Malaysian operators such as Bumi Armada, unresolved US-China trade dispute, deteriorating global economic growth outlook and easing of US pipeline constraints. Our top picks are still companies with stable and recurring earnings such as Dialog Group, Serba Dinamik and Yinson. We like the recurring income business model of Dialog and Serba Dinamik, which are involved in operation and maintenance services. Dialog’s earnings visibility is further secured by the Pengerang Deepwater Terminal project with its enlarged buffer zone while Yinson may secure another major FPSO contract next year.

Source: AmInvest Research - 11 Mar 2019