Investment Highlights

• Record full-year earnings. Petronas’ full-year FY22 core net profit (CNP) surged 2.4x YoY to RM94bil (excluding net impairment losses of RM1.7bil). The jump in earnings in FY22 was driven by higher average selling prices for all products and favourable impact from foreign exchange. These more than compensated for a 32% increase in administrative expenses.

• Weaker earnings in 4QFY22. 4QFY22 revenue rose moderately by 7% QoQ to RM106bil as higher production volumes offset lower selling prices for major products. Despite the stronger revenue, 4QFY22 CNP fell by 24% QoQ dragged by lackluster performances in the upstream and downstream segments. We attribute the QoQ weakness in upstream and downstream divisions in 4QFY22 to weaker crude and refined product prices and unfavourable foreign exchange movements.

• Sequential improvements in crude production. The group’s 4QFY22 average daily production improved slightly by 5% QoQ due to increased production from Malaysia and international operations. Production volumes were well within the 2019 average output of 2.4mil boe as upstream activities recovered following the easing of movement restrictions. QoQ, 4QFY22 gas production rose by 6% to 1.6mil boe/day while crude oil grew by 2% to 872K barrels/day.

• Missed 2022 capex target. Petronas’ capex of RM50.1bil in FY22 missed its original target of RM60bil by 17% due to delays in project roll-outs. Recall that Petronas’ 2022 capex guidance of RM60bil included a RM20bil sum earmarked for Petronas Chemical’s acquisition of Perstorp Holding AB. Comparing FY22 against FY21, Petronas’ capex increased by 64% to RM50.1bil, out of which upstream accounted for 47%, gas & new energy 11%, downstream 33% and corporate/others 9%.

• Capex to continue. We believe that Petronas will spend RM300bil for capex in the next 5 years. 80% of these will be earmarked for its core business while the remaining 20% will be allocated for decarbonisation and energy transition activities. This translates into annual capex of RM60bil, which implies a vigorous pipeline of projects to be dished out by Petronas.

• No dividend for 4QFY22. As expected, Petronas did not declare any dividend in 4QFY22. Still, the group has paid out dividends of RM50bil in 2022, which doubled from RM25bil in 2021. In a related development based on the revised Budget 2023, Petronas is expected to pay RM40bil dividends to the federal government. While this represents a RM5bil or 14% increase from the RM35bil budgeted under the previous government, we think that it is conservative as the government is projecting oil prices of US$80/barrel.

• Resilient domestic sector outlook is here to stay. Prospects for oil and gas operators with exposure to upstream production such as Hibiscus Petroleum are bright as crude oil prices are still above US$80/barrel. The floating production, storage and offloading (FPSO) sub-sector is also expected to benefit not only from higher prices but also from smaller competition as many operators have exited the business after the 2015–2017 downturn. In addition as highlighted in the Petronas Activity Outlook 2023-2025, rig operators (Velesto Energy and Icon Offshore) and platform fabricators (MHHE and Sapura Energy) are anticipated to benefit from rising upstream activities in the next 3 years.

• Maintain full-year oil price projection of US$80-90/barrel for now. Notwithstanding forecasts of softer demand due to a slowdown in the global economy, we maintain our view that crude oil prices will remain elevated at US$80-90 per barrel in 2023F. In comparison, EIA’s Short-Term Energy Outlook projects crude oil prices at US$83.63/barrel for 2023F and US$77.57/barrel for 2024F. Our outlook is premised on the longer-than-expected supply disruptions caused by the Russia-Ukraine war. This has triggered economic sanctions, voluntary shunning of investments by international oil companies, substantive global supply chain disruptions and elevated risk premiums for commodities.

• Risk of shortfall in supply. Apart from the voluntary corporate sanctions on Russia, there is risk that the shortage in supply will persist. Major oil-exporting nations have been unable to ramp up production to pre-pandemic levels after the under-investment in the past 5 years. Other price catalysts are lower-than-expected production by OPEC+ and Russia as well as China’s robust economic recovery following the relaxation of Covid-19 restrictions.

• Reiterate OVERWEIGHT on the sector. We continue to like Dialog Group for its resilient noncyclical tank terminal and maintenance-based operations and Yinson Holdings for its niche exposure in the thriving FPSO sub-sector. We also like Petronas Gas, which offers compelling dividend yields supported by the group’s efficient capital structure and resilient earnings base.

Source: AmInvest Research - 14 Mar 2023