Investment Highlights

• Petronas registered a 4Q2020 core net loss of RM1.5bil due to a lumpy 25% QoQ increase in operating expenses despite revenue rising by 7% QoQ from higher crude production and a slight 3% improvement in Brent crude oil price to US$44/barrel. We believe the higher opex stemmed from delayed year-end spending, which also caused selling & distribution expenses to rise by 44% and administration costs by 22%. For FY20, the group’s core net profit plunged 78% YoY to RM8.8bil due to a 35% drop in Brent crude oil prices to US$42/barrel and 8% contraction in crude oil output (see Exhibit 3).

• Increased crude production output but below pre-Covid levels. Petronas’ 4Q2020 crude oil production increased by 10% QoQ to 2.3mil barrels of oil equivalent (BOE). However, the output, which is still below pre-Covid-19 levels, declined by 14% YoY largely due to lower demand during the global lockdown. This dragged FY20 output by 8% YoY to 2.2mil BOE.

• Overachieved in capex cut. Petronas’ 4Q2020 capex rose 43% QoQ to RM11bil mainly from spending in the upstream (+22%) and gas & new energy (+38%) divisions. For FY20, capex shrank 30% YoY to RM33.4bil from a 41% decrease in upstream and 52% contraction in downstream. Hence, Petronas has over-achieved its targeted capex reduction of 21% for FY20. Upstream spending continued to be weak, accounting for 43% of FY20 group capex vs. 51% in the previous year. Geographically, the spending was almost evenly distributed in Malaysia and overseas. However, FY20 operating expenditures declined by 12%, exactly as targeted by management earlier last year despite the lumpy year-end increase. Petronas continues to reposition for the “Great Reset” following the impact of the unprecedented Covid-19 pandemic and uncertainties in Opec production cuts amid the global energy transition towards net zero carbon emission targets. Hence, the group will prioritise cost efficiencies and technology-driven productivity while de-risking its portfolio by pivoting towards faster cash-generating investments with less volatile profiles. Petronas will also encourage local players to move towards digitalisation and renewable energy solutions.

• Higher dividend declared despite losses. Petronas declared a final dividend of RM18bil, to bring FY20 dividends to RM28bil (+17% YoY) despite a difficult year beset by global demand contraction caused by the Covid-19 pandemic together with the Saudi-Russia price war which erupted in early 2020, contributing to an FY20 net loss of RM24bil (including asset impairments of RM32.7bil) vs. an FY19 net profit of RM33bil. The high dividend was not surprising given Petronas’ strong FY20 balance sheet which boasts net cash of RM52bil and reserves of RM331bil.

• Precarious oil outlook amidst severe US weather and Saudi quota. Even though Brent crude oil prices have risen to US$64/barrel currently vs. our unchanged crude oil price forecast of US$50–US$55/barrel for 2021 and US$55–US$60/barrel for 2022, we note that the price outlook remains precarious. This is in view of the 14% drop in US crude inventories to 463mil barrels currently from the all-time high of 541mil barrels in June last year which stemmed from the unusually cold US weather in February, disrupting production together with the Saudi production cut of 1mil barrels/day. However, US shale production could rebound when the weather improves while the Saudi quota may unravel given the brighter oil price environment amid weak global demand. For comparison, the EIA’s Short-Term Energy Outlook currently projects Brent oil price at US$53/barrel for 2021 and US$55/barrel for 2022.

• Sluggish order flows in 4Q2020. Excluding Serba Dinamik’s huge civil and ICT jobs in the UAE, new contract awards in 2020 for Malaysian operators tumbled 42% YoY to RM6.6bil. However, including Serba’s lumpy UAE projects, the 2020 new orders instead rose 38% YoY to RM15.8bil. New project rollouts were still sluggish in 4Q2020, as fresh jobs fell 32% YoY to only RM1.5bil. Nevertheless, we note that this was still better than the 3-year low of RM569mil in 1Q2020, which could mean that the worst of the Covid-19 impact is behind us.

• Maintain OVERWEIGHT call with 8 BUY calls vs. only 1 HOLD. We continue to like Dialog Group and Serba Dinamik Holdings due to their resilient non-cyclical tank terminal and maintenance-based operations. We recommend Yinson for its strong earnings growth momentum from the full-year contributions of FPSO vessels Helang, off Sarawak, Abigail-Joseph in Nigeria and Anna Nery in Brazil together with multiple charter opportunities in Brazil and Africa. We also like Sapura Energy, which will complete its RM10bil debt restructuring package soon and position the formidable EPCIC group to secure fresh global orders. Meanwhile, Petronas Gas offers highly compelling dividend yields from its optimal capital structure strategy and resilient earnings base.

Source: AmInvest Research - 1 Mar 2021