Investment Highlights

• Robust 1HFY22 performance on elevated oil prices. Petronas’ 1HFY22 core net profit (CNP) soared 3x YoY to RM44bil (excluding net impairment losses of RM2.2bil) mainly from a 66% increase in average Brent crude oil price to US$108/barrel and a 3% increase in daily production to 2.4mil barrels of oil equivalent (boe), which partially mitigated higher operational costs. Meanwhile, despite the group’s 2QFY22 revenue surge of 19% QoQ to RM93bil on the back of higher average realised prices for all products and favourable foreign exchange rate, CNP rose by a slower 6% QoQ mainly due to elevated operating expenses coupled with a 6%-point increase in the effective tax rate to 31%.

• Crude production levels remain largely intact. While Petronas’ 2QFY22 average daily production slightly dropped by 3% QoQ, it sustained well within the 2019 average output of 2.4mil boe amid undisrupted upstream activities following the easing of movement restrictions. QoQ, 2QFY22 gas production moderated by 5% to 1.5mil boe/day while crude oil climbed 2% to 855K barrels/day.

• 1HFY22 capex back to 2019 levels. Petronas also ramped up its capex spending in 1HFY22 by 49% YoY to RM19bil from RM13bil in 1HFY21, mainly attributable to a 2x increase in allocation for upstream projects. We reckon that 1HFY22 capex already surpassed the RM16bil level in 1HFY19, which is fairly in line with the group’s earlier target to achieve prepandemic spending levels in 2022. Notably, 1HFY22 capex also represented 47% of its full-year FY22F capex target of RM40bil (excluding a RM20bil sum earmarked for Petronas Chemicals Group’s acquisition of Perstorp Holding AB), in which upstream accounted for 63%, gas & new energy 13%, downstream 13% and corporate/others 11%. As a comparison, 1H historically accounted for 33%–44% of the group’s capex over the past 3 years.
  Recall that Petronas planned to spend half of the annual capex allocation on domestic investments with the remainder on international investments. Thus, domestic oil and gas players are anticipated to reap the benefits of higher job flows over the coming quarters. Petronas also remains committed towards achieving its net-zero carbon emission targets as shown by planned investments in the clean and renewable energy segments. To recap, that the group will allocate 10% of FY22F capex or RM4bil for non-traditional spaces such as specialty chemicals and solar energy.

• Higher dividend payout ratio. Backed by robust earnings growth, Petronas declared another dividend of RM25bil in 2QFY22 following a similar quantum declared for FY22F on 28 February this year. This also raised YTD 2022 dividend by 7x YoY to RM50bil compared to RM7bil in 1HFY21, translating to a payout ratio of 121%.

• Accelerated job flows. The sector’s contract awards in 2Q2022 to Malaysian oil & gas operators remained robust at RM3bil (Exhibit 2), largely contributed by: (i) Sapura Energy’s award of 6 major contracts in the Asia Pacific and Atlantic regions with a combined value of RM2.7bil; and (ii) Coastal Contract’s award of RM252mil contracts involving the charter contract for a vessel and the extension of an existing charter contract for a liftboat. All in, job awards were up by 49% QoQ compared to RM2bil in 1QFY22, which again demonstrated heightened activity levels in the oil and gas sector.

• 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. Oil and gas operators directly exposed to upstream production such as Hibiscus Petroleum should enjoy higher oil prices while the floating production, storage and offloading (FPSO) sub-sector stands to benefit given the decimated number of operators during the previous downturn in 2015–2017.

• Lower Brent oil price projection at US$90–100/barrel for the remainder of 2022 and US$80–90/barrel for 2023. Despite the recent pullbacks in oil prices to US$90–100/barrel amid expectations of slowing global economic growth following the rate hike cycles in major economies, we maintain our view that crude oil prices will remain elevated over an extended period. This stemmed from the uncertain geopolitical impact from Russia’s Ukraine invasion that has triggered cascading sanctions, voluntary shunning of investments by international oil companies, substantive global supply chain disruptions and elevated risk premiums for commodities. Besides voluntary corporate sanctions on Russia, 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.

• Reiterate our OVERWEIGHT rating on the sector. We continue to like Dialog Group on the back of its resilient noncyclical tank terminal and maintenance-based operations, as well as Yinson Holdings for its niche exposure in the exceptionally thriving FPSO sub-sector. We also like Petronas Gas, which offers highly compelling dividend yields from its optimal capital structure strategy and resilient earnings base.

Source: AmInvest Research - 1 Sept 2022