Investment Highlights

• Petronas’ 3Q2019 core earnings fell 33% QoQ. Excluding impairments of RM2.6bil mostly on gas assets, Petroliam Nasional’s (Petronas) 3Q2019 net profit dropped 33% QoQ to RM8.4bil due to lower crude oil prices as Brent decreased by 10% to US$62/barrel, crude production slipping by 11% to 2.1mil barrels on higher decommissioning activities, a 10% increase in operating costs and 15% increase in finance cost. This was partly offset by a 1.3% depreciation in the MYR vs. the USD and a 6-percentage point reduction in effective tax rate to 18%.

• However, 9M2019 core was down by only 4% YoY. The upstream segment, which now accounts for 15% of group revenue but 46% of its profit after tax (PAT) for 9M2019, was largely impacted by the 10% YoY decrease in average crude oil prices to US$65/barrel which resulted in its PAT sliding by 12% YoY to RM17bil. This was partly offset by higher average sales gas volume rising by 114mmscfd due to higher demand while gas produced rose 5% to 1.4mil boe. Hence, Petronas’ 9M2019 core net profit slid by only 4% YoY to RM33bil.

• Capex spending rebounded by 78% QoQ and 59% YoY. Petronas’ 3Q2019 capex rebounded by 78% QoQ and 59% YoY to RM13bil 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 54% in 3Q2019 from 44% in 3Q2018. Nevertheless, 3Q2019 domestic spending still increased by 39% QoQ and 29% YoY to RM6bil, 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 9M2019 capex has risen by 9% YoY to RM29bil, we expect a continuation of the upward momentum next year.

• Malaysia’s 9M2019 contract awards rose 14% YoY to RM9.2bil following a lull in 1Q2019 and driven by multiple awards to Sapura Energy and Malaysia Marine & Heavy Engineering Holdings (MMHS) securing a RM2.5bil Kaswari central processing platform job while Bumi Armada secured a 30% stake in ONGC’s KG-DWN 98/2 FPSO charter. While 3Q2019 job orders rose 76% YoY to RM3.4bil, these were down 15% QoQ. Over the 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.

• Lowering our 2019–2020 crude oil forecast to US$60–65/barrel from US$65-70/barrel amid high volatility. Following the surprise disruption to Saudi Arabia’s production from drone attacks purportedly launched by Iran-backed Yemeni Houthis in September this year, Brent crude oil prices have remained above US$60/barrel with the YTD 2019 average at US$64/barrel. However, with US crude inventories rising by 8% to 450mil barrels since mid-September, we have lowered our 2019–2020 price forecast to US$60-65/barrel from US$65–US$70/barrel. Since the beginning of 2019, the EIA’s Short-Term Energy Outlook has continuously revised its crude oil projections, moving its Brent oil projection between US$60/barrel and US$70/barrel and currently settling at US$64/barrel for 2019 and US$60/barrel for 2020.

• We maintain OVERWEIGHT on the sector as prospects have radically brightened with rising asset utilization globally which supported service providers’ improving results. While we have BUY calls for MISC, 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.

Source: AmInvest Research - 27 Nov 2019