Highlights

• YoY: Petronas group 2Q17 core net profit (excluding impairment on Canada LNG) inched up by 1.7% despite a 13.5% drop in crude production (due to lower Iraq production and lower activities in Canada) attributed to improvement in oil prices. On the other hand, downstream division appeared to be relatively flat despite improvement in product prices due to lower volume and lower refining margin.

• QoQ: Core net profit weakened by 6.3% due to (i) lower crude and gas volume coupled with weaker sequential oil prices; and (ii) lower downstream volume due to seasonality.

• 1H17: Core PAT surged 12.4% mainly underpinned by (i) stronger upstream performance despite production drop due to improvement in oil prices; and (ii) stronger downstream division performance despite lower overall volume caused by better refining and trading margins achieved. During the period, the group has also paid RM6.5bn, representing 50% of the group’s commitment of RM13bn for dividend in 2017.

• CAPEX still down. Despite overall improvement in its financial results, Petronas still appeared to be unwilling to spend more in the upstream industry. In 2Q17, only RM9.4bn was spent, mainly on RAPID project in Johor. This represented 37.4% plunge in CAPEX by the group, which largely explains the significant slowdown in upstream services industry in 2017. We do not expect significant pick up in spending by the group in 2H17 due to its cautious stance. Therefore, the upstream industry may remain subdue for the rest of 2017.

• Canadian project shelved. On 25 Th Jul 2017 Petronas has decided that it would not proceed with the Pacific Northwest LNG, development of a LNG export facility at Lelu Island, British Columbia. The group has recognised cost of RM1.5bn with respect of the non-FID of the project. This would be good news for the local upstream services players as Petronas would turn its attention back to Malaysia albeit project roll out might not be as early as in 2017.

Rating

NEUTRAL ( ↔ )

• While improvement is expected in 2017 for O&G sector, we believe it has already been reflected in the market value of stocks under coverage. Meanwhile, we do not anticipate major CAPEX upcycle by Petronas in the year due to uncertainty in oil prices.

Valuation

• Top Pick – Dayang (BUY; TP:RM1.20)
  - Earnings appear to be on recovery with core profit registered in 2Q17. Prime candidate for upcoming MCM and Pan Malaysia HUC projects (to be awarded in 2018).
  - Relisting of Perdana further unlocks value for shareholders through dividend-in-specie.

Source: Hong Leong Investment Bank Research - 28 Aug 2017