Investment Highlights

• Petronas’ recovery from higher prices. Petronas’ 1H2021 core net profit rose 81% YoY to RM15.8bil (excluding net impairment writebacks of RM240mil) mainly from a 64% rise in average Brent crude oil price to US$65/barrel and 4% expansion in daily production to 2.3mil barrels of oil equivalents (boe). Likewise, the group’s 2QFY21 core net profit rose 10% QoQ to RM8.3bil from a 13% increase in Brent crude oil price to US$69/barrel, partly offset by a slight decline in daily output and a 12% increase in operating costs on higher expenditures on administration (+24% QoQ) and sales (+14% QoQ) (Exhibit 3).

• Slight variation in crude production output. While Petronas’ 2Q2021 average daily production slid by 4% QoQ to 2.3mil boe, this remains within pre-Covid levels given the 2019 average output of 2.4mil boe. While sales volume rose for liquefied natural gas and petroleum products in 1H2021, upstream activities stayed on track since the start of the Covid-19 pandemic last year.

• Capex down 14% YoY. Petronas’ 1H2021 capex declined by 14% YoY to RM12.7bil mainly from a 32% drop due to project delays and rephasing of activities caused by movement restriction orders. At this stage, 1H2021 appears to be below Petronas’ annual capex plans, accounting for 28%–32% of the national company’s target of RM40bil–RM45bil over the next 5 years. As a comparison, 1H accounted for 33%–44% 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.

• 1HFY21 dividends of RM7bil. Petronas has declared its first interim dividend of RM7bil for 2021, which translates to a comfortable payout ratio of 43.7%. Recall that the group declared dividends of RM28bil in 2020 despite registering a loss of RM24bil. To date, the group has paid RM8bil or 44% of the 4Q2020 dividend of RM18bil declared on 25 February this year.

• Sluggish 2Q2021 order flows. Excluding Serba Dinamik’s RM7.7bil civil project award in 2Q2020 to build an innovation hub in the UAE given accounting issues raised by its former auditor, new contract awards in 1H2021 to Malaysian oil & gas operators rebounded 2.6x YoY to RM5.6bil, largely from multiple jobs awarded to Sapura Energy. The recovery 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. However, we note that 2Q2021 awards decreased 33% QoQ to RM2.2bil from global supply-chain disruptions which are being resolved.

• Maintain 2021–2022 oil price projection at US$60–65/barrel. Brent crude oil prices have recovered to US$70/barrel currently after falling to US$65/barrel on 20 August this year on concerns that the Covid-19 Delta variant could dampen global demand. As US inventories slid 14% from the YTD peak of 502mil barrels on 26 March 2021 to near pre-pandemic levels at 433mil barrels currently, we maintain our 2021–2022 price projection at US$60–65/barrel vs. the EIA’s Short-Term Energy Outlook of US$69/barrel for 2021 and US$66/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. This is supported by Yinson recently signing a memorandum of understanding to supply a mid-sized floating production, storage and offloading vessel to Enauta’s Atlanta field in Brazil.
  
  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.

Source: AmInvest Research - 30 Aug 2021