Investment Highlights

• Weaker performance amidst challenging conditions. Malaysia’s national oil and gas company Petroliam Nasional (Petronas) reported a decline in FY23 core net profit (CNP) of 15% YoY to RM80.5bil, after accounting for net impairment and write-backs . The performance comes on the back of weaker revenue of RM338.4bil, which was dragged particularly by the upstream segment, impacted by a 31% drop in product sales and unfavourable averaged realised prices as the reference price for Brent crude oil for FY23 was lower by 18% at US$82.64/barrel (bbl) vs. US$101.32/bbl in the prior year. Similarly, the gas segment also delivered a weaker performance albeit to the lower decline of 17% due to lower average realised prices of liquefied natural gas (LNG) and processed gas and LNG sales volume.

• Sequential decline from higher costs and amortisation. Despite registering a stronger sequential performance at the topline for 4QFY23 of RM91.7bil from improved sales volume, particularly from the gas segment as gross LNG sales volume rose to 8.95mil tonnes (vs. 7.47mil tonnes in 3QFY23), CNP declined by 21% QoQ to RM17.6bil due to: (a) higher material costs and sales/administrative expenses which led to operating costs rising by 23% and (b) higher amortisation due to additional capitalisation of assets.

• Stronger crude production driven by Malaysian assets. The group’s 4QFY23 average daily production improved slightly by 9.7% QoQ to 2,550 barrel of oil equivalent (boe) per day due to increased natural gas production from Malaysian operations . This brings production volume to a stable 2,431 boe/day, well within range of the pre-pandemic average output of 2.4k boe/day as upstream activities showed a solid recovery following the easing of post-Covid-19 movement restrictions.

• Despite missing FY23 capex target, Petronas remains committed to its longer-term guidance. The group recorded a capex of RM52.8bil in FY2023, missing our expectation of RM60bil by 12% . Recall that this is premised on its RM300bil capex guidance over the next 5 years (2023-2027), which remains unchanged for now. Capex spend for FY23 was mainly attributable to upstream and gas projects, particularly for investments in Block 20, Angola and Block Masela, Indonesia. Notably, domestic capex rose by 41% to RM26.2bil, driven by developments for: (a) the near shore floating LNG project in Sabah, (b) the Kasawari gas field development and (c) the CO2 sequestration facilities in Sarawak. Moving forward, the group reiterates that 80% of the expected capex range of RM50-60bil for FY24 will be allocated to its core businesses to ensure energy security for the nation whilst 20% will be towards decarbonisation projects and expansion into cleaner energy solutions, particularly for new outfit Gentari, in our view.

• Lesser dividend contribution moving forward supportive of capex ramp-up. Petronas paid out dividends amounting to RM40bil in FY23 to the federal government, a decline of 20% YoY. In line with the announcement made during the tabling of Budget 2024, Petronas announced RM32bil of dividends which translates to a similar reduction of 20% YoY for FY24. We believe this is broadly supportive of a potential ramp-up in capex spend moving forward.

• Supportive domestic capex by Petronas a boon for local oil and gas players. Premised on this and guided by the 3- year Petronas Activity Outlook (2023-2025), we see potential beneficiaries arising from a broad spectrum, as follows:
  
  i. The rise in planned upstream activities, particularly for re-activation of idle wells and offshore platform fabrication that could benefit Velesto Energy, Malaysia Marine & Heavy Engineering and Sapura Energy;
  
  ii. Stable provision of offshore support vessels (OSV) to support well drilling and projects (beneficiaries: Dayang Enterprise, Icon Offshore, Perdana Petroleum, Alam Maritim Resources and Coastal Contracts); and
  
  iii. Catch up in planned offshore maintenance, construction and modification (MCM) works which have been delayed due to the Covid-19 pandemic (beneficiaries: Deleum (BUY, FV1.66/share), Dayang Enterprise, Sapura Energy and Icon Offshore).

• Maintain full-year 2024 oil price projection of US$85/bbl 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. As a comparison, our forecast is broadly close to EIA’s Short-Term Energy Outlook expectation of US$83/barrel.

• Maintain OVERWEIGHT on the sector. Our top picks are Dialog Group (BUY, FV: RM2.91) which is supported by its resilient non-cyclical tank terminal and maintenance-based operations together with strategically-located Pengerang developments; and Yinson (BUY, FV: 3.96), the primary beneficiary of the FPSO upcycle. We also like Petronas Gas (BUY, FV: 19.97), which offers a decent dividend yield of 4.7%, which can be raised further from the optimisation of its capital structure together with sustainable recurring earnings for its gas transportation and processing operations.

Source: AmInvest Research - 18 Mar 2024