Investment Highlights

• Petronas rebounds from higher prices. Petronas’ 9M2021 core net profit surged 2.7x YoY to RM28bil (excluding net impairment write-backs of RM2bil) mainly from a 66% increase in average Brent crude oil price to US$68/barrel and 4% increase in daily production to 2.3mil barrels of oil equivalents (boe), notwithstanding a 12% rise in operating costs driven by sales expenses (+19% YoY) and administration (+5% YoY). Likewise, the group’s 3QFY21 core net profit rose 48% QoQ to RM12.3bil from a 6% increase in Brent crude oil price to US$73/barrel, partly offset by an 8% decline in daily output to 2.1mil boe.

• Sharp drop in QoQ crude production output. Petronas’ 3Q2021 average daily production slid by 8% QoQ to a pre-Covid level of 2.1mil boe, below the 2019 average output of 2.4mil boe which we believe could be partly attributed to the lower maintenance activities during Covid 19-imposed movement restrictions. Over the past 10 years, 2Q2020 was the only quarter amid the Covid-19 demand collapse when overall production was lower than 3Q2021. QoQ, 3Q2021 gas production fell by 10% to 1.3mil boe while crude oil decreased by 4% to 787K barrels/day.

• Likely to fall short of 2021 capex target. Petronas’ 9M2021 capex declined by 9% YoY to RM20.4bil mainly from a project delays and rephasing of activities caused by movement restriction orders, which caused upstream capex to drop by 11% YoY to RM9.6bil. At this stage, 9M2021 appears to be below Petronas’ annual capex plans, accounting for 45%–51% of the national company’s annual target of RM40bil–RM45bil over the next 5 years. As 9M accounted for 62%–67% of the group’s capex over the past 3 years, we expect Petronas to fall short of its capex plans this year. 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 aims to prioritise cost efficiencies and technology-driven productivity while de-risking its portfolio by pivoting towards faster cash-generating investments with less volatile profiles.
• Expect higher dividends next quarter. Petronas did not declare any interim dividend following its first interim dividend of RM7bil in 2QFY21 vs. 9MFY20 dividend of RM10bil albeit registering a loss of RM24bil in FY20. As 9MFY21’s payout ratio translates to only 23%, we expect higher dividend announcements in 4Q2021 to rival the RM28bil total declared last year. To date, 33% of the 4Q2020 dividend of RM18bil declared on 25 February for 2020 has yet to be fully paid.
• Recovery in 3Q2021 order flows. The sector’s contract awards in 3Q2021 to Malaysian oil & gas operators rebounded 86% QoQ to RM4.2bil (Exhibit 2), largely from multiple jobs awarded to Sapura Energy. Excluding a lumpy RM1.5bil construction award to Serba Dinamik to build a data centre in Abu Dhabi in August 2020, the 3Q2021 orders rose 41% YoY.

• Overall sector momentum intact. Notwithstanding the Limbayong delay or potential re-bidding exercise, we remain convinced that oil & gas contract rollouts will gather momentum, particularly in selected segments in the value chain better positioned to benefit from projects sanctioned by national oil companies, such as the floating production storage and offloading (FPSO) subsector given the decimated number of operators during the previous downturn in 2015-2017.
  Recall that Yinson was the sole bidder to finally secure the the FPSO charter of the Parque das Beleias field in Brazil that has been cancelled twice over the past year. Yinson is also hopeful of securing the contract by January next year for an FPSO with potential conversion costs of up to US$500mil to the Atlanta field in the Santos Basin, offshore Brazil after signing a Memorandum of Understanding to exclusively negotiate with Brazil-based Enauta Participacoes S.A. Besides bidding for the Pecan charter off Ghana with its purchase option for Woodside's Nganhurra FPSO, Yinson together with Technip Energies are undertaking pre-front-end engineering and design (FEED) services for Total Energies for two large FPSOs to be deployed in Cameia, Block 20/21, Angola and Maka, Block 58, Suriname.

• Maintain 2021–2022 oil price projection at US$70–75/barrel as Brent crude oil prices have fallen below US$80/barrel on resurgent fears that the Covid-19 Omicron variant could dampen global demand. As US inventories slid 14% from the YTD peak of 502mil barrels on 26 March 2021 to below pre-pandemic levels at 434mil barrels currently (3% below the 2019 average of 448mil barrels), 2021–2022 price projection is in line with the EIA’s Short-Term Energy Outlook of US$72/barrel for both 2021 and 2022. Notwithstanding rising global vaccination rollouts, we are cautious on the emergence of new viral variants and the possibility of Iranian crude re-entering global markets, rebound in US shale production and further relaxation of OPEC production quotas.

• Maintain OVERWEIGHT call. We continue to like Dialog Group for its resilient non-cyclical tank terminal and maintenance-based operations and Yinson's recent win for the Parque das Beleias FPSO charter together with strong earnings growth momentum from the full-year contributions of FPSO vessels Helang, off Sarawak, Abigail-Joseph in Nigeria and Anna Nery in Brazil, plus multiple charter opportunities in Brazil and Africa. Meanwhile, Petronas Gas offers highly compelling dividend yields from its optimal capital structure strategy and resilient earnings base.

Source: AmInvest Research - 1 Dec 2021