Investment Highlights

• Slightly lower QoQ Petronas earnings. Petroliam Nasional’s (Petronas) net profit slid 3% QoQ to RM12bil due to lower oil & gas production and a 6% decline in crude oil prices, higher contribution to the National Trust Fund amid a 1% appreciation of the ringgit vs the USD, partly offset by lower year-end sales expenditures. However, the group’s net profit rose 6% due to a 5% MYR depreciation and higher sales volume despite a slight reduction in output, partly offset by a 13% increase in sales and administration expenses.

• A slight output reduction. Petronas’ 1Q2019 upstream revenue slipped 7% QoQ to RM31bil as daily gas output declined 5% to 1.5mil barrels of oil equivalent (boe) due to statutory turnaround activities while crude oil production was flattish at 930K boe. On a YoY comparison, upstream revenue rose 10% due to a 4% increase in crude oil prices, sales volume and the 5% MYR depreciation, which offset the 1% decline in oil & gas production.

• Capex spending decreased by 31% YoY to RM8bil. Petronas’ 1Q2019 capex fell 31% YoY and 59% QoQ to RM8.3bil, which was used mainly for upstream spending with the US$27bil Pengerang Integrated Complex (PIC) in Johor reaching 99% completion. We do not view this decline as alarming for the upstream sector as this could be partly due to multiple projects’ timing of cost recognition and does not signal upcoming cost cutbacks given that Petronas’ 2019-2021 Activity Outlook project a gradually rising utilisation of rigs, vessels, pipeline/offshore installations next year. In Petronas’ Activity Outlook released in December last year, jack up rig usage had been revised upwards to 16-18 this year from 7-10 forecasted by the group in its 2018-2020 outlook in the previous year. Likewise, Petronas’ 2019 projection for offshore installations has been raised from 6-7 to 8-9. We note that 2018 capital expenditure rose 5% YoY to RM46.8bil, driven by a 2.8x surge in spending for international projects despite a 32% contraction for Malaysia as the Refinery and Petrochemical Integrated Development in Johor has reached almost full completion.

• No interim dividend in this quarter. With a net cash balance of RM96bil, Petronas should easily finance the remaining FY18 dividend payment of RM42bil, which comprises of a final dividend of RM24bil and part of the special dividend of RM30bil.

• Maintain 2019-2020 crude oil forecast at US$65-70/barrel. With US crude inventories up 8% since the beginning of the year to 476mil barrels and Brent crude prices declining to US$61/barrel while averaging US$66/barrel to date, we maintain 2019-2020 price forecast at US$65-70/barrel since 3 December last year. Over the past 3 months, the EIA has raised its Brent oil projection to US$70/barrel from US$61/barrel for 2019 and US$67/barrel from US$62/barrel for 2020 on tighter global markets in mid-2019 amid increasing supply disruption risks in Iran and Venezuela. We highlight that EIA’s constant price forecast revisions are affected high market volatility given multiple demand-supply dynamics amid global demand expectations likely to be depressed with the US recently declaring new tariffs with Mexico and withdrawal of India’s preferential trade status amid poor visibility of a resolution to trade tensions with China.

• Contract awards declined 20% YoY and 27% QoQ to RM3bil in 1Q2019, largely due to Sapura Energy securing lumpy central processing platform jobs for the Pegaga project off Sarawak in 1Q2018 together with the developments for the Hokchi field in the Gulf of Mexico and KW-DWN 98/2 block off India in 4Q2018. Nevertheless, 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 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 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.

Source: AmInvest Research - 3 Jun 2019