Investment Highlights

• Petronas’ 1Q2021 rebounded to a RM7.5bil core net profit from a loss of RM1.5bil in 4Q2020 primarily due to a 32% QoQ increase in Brent crude oil prices to US$61/barrel, 5% growth in oil & gas production, 10% decline in operating costs, 15% contraction in depreciation and 19% reduction in finance costs. We believe the lower QoQ operating costs stemmed from lumpy year-end spending for selling/distribution and administration segments in 4Q2020 (Exhibit 3).

• Higher crude production output but slightly below pre-Covid levels. Petronas’ 1Q2021 crude oil production increased by 5% QoQ to 2.4mil boe. However, the output, which is still slightly below pre-Covid-19 levels, declined by 3% YoY largely due to soft demand caused by the Covid-19-inflicted global movement restrictions.

• Capex down 21% YoY. Petronas’ 1Q2021 capex shrank 21% YoY to RM6.7bil mainly from spending in the upstream (-45%) and to a lesser extent, downstream (-27%) and gas/new energy (-9%) segments, largely due to project delays and rephasing of activities caused by movement restriction orders. At this stage, the 1Q2021 appears to be below Petronas’ annual capex plans, accounting for 15%–17% of the national company’s target of RM40bil - RM45bil over the next 5 years.
  
  As a comparison, 1Q accounted for 17%–25% of the group’s capex over the past 3 years.
  
  Recall that Petronas plans to spend 55% of the annual capex allocation on domestic investments, with the remainder on international investments. New energy initiatives will account for 9% of its annual capex, almost double the previous 5% allocation set in 2020. 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.

• No dividend declaration for first quarter. While Petronas did not declare any 1Q2021 dividends, the group paid RM2bil or 11% of the 4Q2020 dividend of RM18bil declared on 25 February this year.

• Rebound in 1Q2021 order flows. New contract awards in 1Q2021 surged 5.8x YoY and 2.2x QoQ to RM3.3bil, largely from multiple jobs awarded to Sapura Energy. The much stronger YoY rebound stems from the spending collapse to only RM569mil in 1Q2020 due to the earlier Saudi-Russia price war and onset of the Covid-19 pandemic.

• Higher crude prices support improving prospects. While Brent crude oil prices have risen by 15% to US$70/barrel currently from US$61/barrel in 1Q2021 on rising global demand while US inventories slid 4% from the YTD peak of 503mil barrels on 19 March 2021 to 484mil barrels currently, we maintain our 2021–2022 price projection of US$60–65/barrel vs. the EIA’s Short Term Energy Outlook of US$62/barrel for 2021 and US$61/barrel for 2022. While US shale production could rebound and Opec continue to raise production quotas against the backdrop of the brighter oil price environment, this could be mitigated by rising global demand on the back of Covid-19 vaccine rollouts in 2H2021.

• Maintain OVERWEIGHT call with 8 BUY calls vs. only 1 SELL. We continue to like Dialog Group for its resilient non-cyclical tank terminal and maintenance-based operations and Yinson’s 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 as its completed RM10bil debt restructuring package positions 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.
  
  Our SELL call is maintained on Serba Dinamik, which has triggered an investigation by the Securities Commission following plans to replace its auditor KPMG, who raised concerns on multiple transactions and balances, and appointment of an independent special reviewer of those issues.

Source: AmInvest Research - 1 Jun 2021