Investment Highlights

• Petronas’ 3Q2020 core PAT turned around to RM2.6bil from a 2QFY20 loss of RM0.9bil. Excluding asset impairments of RM5.7bil, Petroliam Nasional’s (Petronas) results rebounded from a 2Q2020 loss of RM0.9bil to 3Q2020 profit after tax (PAT) of RM2.6bil due to higher product prices and slight improvement in crude production volumes following the sharp downturn in April this year from the initial global impact of the Covid19 demand contraction. This is in tandem with average Brent crude oil prices rising 36% QoQ to US$43/barrel (see Exhibit 3).
• Slight improvement in crude production output but below pre-Covid levels. Petronas’ 3Q2020 crude oil production increased slightly by 0.7% QoQ to 2mil barrels of oil equivalent (BOE). However, output, which is still below pre-Covid-19 levels, declined 4% YoY largely due to lower demand during the global lockdown. This likewise dragged 9MFY20 output by 6% YoY to 2.2mil BOE.
• Capex spending rose 21% QoQ. Petronas’ 3Q2020 capex rose 21% QoQ to RM7.7bil mainly from spending in the downstream and gas & new energy divisions. Upstream spending continued to be weak, dropping 5% QoQ to only RM2.9bil, accounting for only 38% of group capex vs 50% in 3Q2019. Geographically, the reduction was more pronounced domestically as the proportion of Petronas’ domestic spending fell to 49% from 54% in 3Q2019. Recall that Petronas has announced cuts of 21% for capital and 12% operating expenditure this year with potentially higher savings generated towards the end of the year. Besides cost compression focus and deferment of selected projects, the group reaffirmed a portfolio shift in line with its net zero carbon emissions target by 2050 which could mean reduced upstream interest in greenfield projects with low prospective returns.
• Even though a measure of optimism has returned for crude oil prices, we expect oil producers to proceed with their planned production cuts for this year given that demand globally remains depressed amid the prolonged Covid-19 movement restrictions and social distancing measures which could mean potentially long-term changes in energy usage. So far, 20% to 30% capex reductions for 2020 have been announced by Exxon Mobil, Royal Dutch Shell, Saudi Aramco and Petrobras.
• Recovering phase. While new contract awards to Malaysian operators halved YoY to RM4.6bil, we note that 3Q2020 orders rebounded 45% QoQ to RM2.4bil largely due to Serba Dinamik’s lumpy civil construction job to build a RM1.5bil data centre in the UAE. Excluding Serba’s UAE project, 3Q2020 orders instead fell 45% QoQ to RM895mil. Even so, we view the slow order flow as the early stages of recovery for the sector which plummeted to a 3-year low of only RM569mil contracts in Covid-19- inflicted 1Q2020.
• RM10bil dividend declared so far in 2020. As we had forewarned, Petronas has declared a dividend of RM10bil, of which RM2bil has been paid so far for 2020. Recall that while Petronas declared a 2019 dividend of RM24bil, the group did not declare any interim dividend in that year. However, given Petronas’ strong balance sheet which boasts net cash of RM61bil and reserves of RM337bil, we expect Petronas to declare additional dividends for 2020 even though the group’s 9M2020 core net profit fell 69% YoY to RM10.3bil.
• Maintain 2020 oil price forecast at US$40–US$45/barrel and 2021 at US$45–50/barrel. YTD, Brent crude oil prices have averaged US$42/barrel with spot price is at US$48/barrel currently from the year-low of US$14/barrel on 22 April 2020. This is supported by US crude oil inventories declining by 10% to 489mil barrels currently from the all-time high of 541mil barrels in June this year. Hence, we maintain our crude oil price forecast at US$40–US$45/barrel for 2020 and US$45–US$50/barrel for 2021. For comparison, the EIA’s Short-Term Energy Outlook projects crude oil price at US$41/barrel for 2020 and US$47/barrel for 2021.
• Maintain OVERWEIGHT call with 6 BUY calls vs. only 1 SELL and 1 HOLD after upgrading MISC to BUY despite in expectation of stronger tanker rates in tandem with a recovering global economy. With Brent crude spot prices stabilising above US$40/barrel, we believe that the down cycle has reached a bottom with the worst experienced in April this year when Brent spot prices fell to a low of US$14/barrel while futures inverted to an abnormal negative price due to lack of storage capacity.
• We continue to like Yinson as its earnings growth momentum from the maiden contributions of floating, production, storage and offloading vessels Helang, off Sarawak, Abigail-Joseph in Nigeria and Anna Nery in Brazil together with multiple charter opportunities in Brazil and Africa. We like Petronas Gas, as the group’s optimal capital structure strategy and resilient earnings base translates to highly compelling dividend yields. We also recommend Dialog Group and Serba Dinamik Holdings due to their resilient non-cyclical tank terminal and maintenance-based operations.

Source: AmInvest Research - 30 Nov 2020