Highlights

• Higher YoY 3Q16 core net profit … Petronas’ 3Q16 core net profit came at RM7.1bn (3Q15: RM6.3bn). However, its 9M16 core net profit dropped to RM24.8bn, down 19.4% YoY. Core earnings exclude extraordinary items comprising mainly of impairment on upstream assets.

• Upstream: Core PAT for the segment declined by 32.1% YoY in 3Q16 mainly due to lower realized oil prices in the quarter consistent with global oil price trend and lower LNG volume due to lower trading volume. This is despite an increase in production volume YoY due to resumption of operations in of Sabah Sarawak Gas Pipeline, higher facilities uptime in Malaysia and Canada, and better production from Indonesia and Australia. A QoQ drop in the quarter is also observed as production of both oil and gas decreased sequentially.

• Downstream: PAT for the segment improved 6.1% YoY primarily due to better international refining and marketing margins. This is despite the lower petroleum product and crude oil sales volume. Meanwhile, petrochemical product sales volume was higher YoY due to better plant operating performance leading to higher production. QoQ, however, 16.5% drop was registered in PAT due to lower sales volume and decline in refining margins.

• CAPEX to-date totalled RM35.9bn… Petronas group has spent RM35.9bn to date mainly on RAPID, upstream projects and Sabah Ammonia Urea (“SAMUR”) project. This accounted for 68.4% of CAPEX target by Petronas as indicated in the press, largely in line in our opinion. We do not anticipate any major change in CAPEX plans by the group as the oil market is still volatile.

• Drawing from its cash coffers? Operational cash flows stood at RM36.1bn, which is almost identical to its ytd CAPEX. This indicates that its operating cash flow at current rate provides little to no buffer for further dividend payment. During the quarter, the group has paid RM12bn worth of dividends, part of RM16bn dividend target for FY16 guided by the group earlier in the year. To sustain its dividend payment in medium term, we opine that the group has to draw from its own cash coffer of RM114.6bn on its balance sheet or issue more debt if terms are more favourable.

Rating

NEUTRAL ( ↔ )

• Positives: Earlier than expected oil price recovery, higher than expected cash cost savings.

• Negatives: Delay in contract rollout, low oil price environment lead to competition and margin compression for contractors.

Valuation

• As Petronas is still uptight in its CAPEX spending given the subdued oil price environment, we still advocate to avoid asset-heavy players whereby the current oil prices would not solve the oversupply issues in that space. Our top pick remains ARMADA (BUY; TP: RM0.85)

Source: Hong Leong Investment Bank Research - 17 Nov 2016