Investment Highlights

• Petronas rebound from higher prices. Petronas’ 2021 core net profit surged 4.5x YoY to RM39bil (excluding net impairment write-backs of RM2.3bil) mainly from a 70% increase in average Brent crude oil price to US$71/barrel and 3% increase in daily production to 2.3mil barrels of oil equivalents (boe), notwithstanding a 21% rise in operating costs driven by administrative (+19% YoY) and sales (+15% YoY) expenses.

• Down sequentially from higher tax charge. QoQ, although 4QFY21 revenue rose 24% from a 9% increment in oil prices and an 8% production growth, the group’s 4QFY21 core net profit slid 7% to RM11.5bil from a RM2.7bil deferred tax provision that drove up effective tax rates by 20% points to 33% together with a 17% increase in depreciation charges.

• Crude production still slightly below pre-Covid levels. Petronas’ 4Q2021 average daily production expanded 8% QoQ to a pre-Covid level of 2.3mil boe, slightly below the 2019 average output of 2.4mil boe which we believe could be partly attributed to the lower maintenance activities amid movement restrictions. QoQ, 4Q2021 gas production rose 12% to 1.5mil boe while crude oil climbed 1% to 797K barrels/day.

• Missed 2021 capex target. As we have forewarned in past updates, Petronas’ 2021 capex missed management’s guidance of RM40bil–RM45bil by 24%–32% amid project delays and supply chain disruptions caused by the Covid-19 pandemic. The actual 2021 spending decreased 9% YoY to RM30.5bil, in which upstream accounted for 48%, gas & new energy 23%, downstream 16% and corporate/others 13%.
  Recall that Petronas had planned to spend 55% of the annual capex allocation on domestic investments with the remainder on international investments. In our view, Petronas’ capex will rebound this year with 4Q2021 spending surging 32% QoQ to RM10bil amid the relaxation in movement restrictions as the group will need to sustain upstream production levels and asset integrity.
  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.

• Higher dividend from increased earnings. As we expected, Petronas’s stronger earnings led to a higher 4Q2021 dividend of RM25bil, up 39% YoY. This raised 2021 dividend by 14% YoY to RM32bil, translating to a payout ratio of 77%, slightly higher than 73% in 2019.

• Slow 4Q2021 award of fresh fabrication jobs. The sector’s contract awards in 4Q2021 to Malaysian oil & gas operators rebounded 3.5% YoY to RM5.3bil (Exhibit 2), largely from a lumpy RM4.5bil contract to Coastal Contracts involving the construction of an onshore gas sweetening plant in Mexico.
  Excluding this contract, 4QFY21 orders would have halved YoY as fabrication jobs awards remain weak amid the rising cases of Covid-19’s Omicron variant globally. Meanwhile, major fabricator Sapura Energy continued to suffer from liquidity concerns which hamper the group’s capacity to secure fresh jobs from Petronas and other multinationals.

• Better prospects of selected segments. We expect selected segments in the value chain to be better positioned to benefit from higher oil prices and projects sanctioned by national oil companies. Operators directly exposed to upstream production such as Hibiscus Petroleum and the floating production storage and offloading (FPSO) sub-sector stand to benefit given the decimated number of operators during the previous downturn in 2015–2017.

• Raising 2022 oil price projection to US$90–95/barrel from US$70–75/barrel following Russia’s surprising invasion of Ukraine that could trigger cascading sanctions, substantive global supply chain disruptions and elevated risk premiums for commodities. For 2023, we raise our projection to US$80–85/barrel, softer than our expectation for this year as higher prices could dampen global demand while spurring fresh investments into the sector and raise production expectations. Meanwhile, supply shortfall risks are escalating with major oil exporting nations unable to ramp up production to pre-pandemic levels due to chronic under-investment over the past 5 years amid investors’ persistent energy transition-driven prerogatives.
  As US inventories have tumbled 17% from the YTD peak of 502mil barrels on 26 March 2021 to below pre-pandemic levels at 416mil barrels presently (7% below the 2019 average of 448mil barrels), our Brent crude oil price projections are now higher than the EIA’s revised Short-Term Energy Outlook of US$83/barrel for 2022 and US$68/barrel for 2023. Downside risks stem from an amicable resolution to the Russia-Ukraine conflict, the emergence of new vaccine-resistant viral variants, the possibility of Iranian crude re-entering the global market and significant rebound in US shale production.
• Maintain OVERWEIGHT rating on the sector as escalating crude oil prices and rising global demand will catalyse faster order flows across the value chain. We continue to like Hibiscus Petroleum’s direct upstream exposure to higher crude oil prices and Dialog Group’s expanding, yet resilient non-cyclical tank terminal and maintenance-based earnings base. Meanwhile, Petronas Gas offers highly compelling dividend yields from its optimal capital structure strategy and resilient earnings base.

Source: AmInvest Research - 2 Mar 2022