Highlights

• YoY: Petronas group core PAT grew 20.8% to RM18.2bn mainly due to: (i) stronger upstream division performance driven by higher realized oil prices and higher sales volume mainly from LNG and petroleum products.

• QoQ: Core net profit surged 86.5% due to higher average realised product prices recorded for major products and higher sales volume for LNG, crude oil & condensate and natural gas.

• FY17: Core PAT surged 24.1% due to: (i) higher realized oil prices resulting in strong upstream division performance despite lower production volume (caused by lower Iraq production and slower Canada activities); and (ii) stronger downstream PAT underpinned by wider petrochemical product spreads.

• CAPEX. The group’s CAPEX declined 11.6% despite 40.5% surge in operating cash flow. This has given the group flexibility of higher dividend payment to the government. For FY17, the group has committed to pay a dividend of RM19bn (FY16: RM16bn) to government, representing 18.8% yoy growth.

• Upcycle in upstream CAPEX unlikely in 2018.

Despite the encouraging operating cash flow due to improved oil prices, we believe that it would not translate into significant increase in contract award for the upstream services players. The key reasons for our argument are: (i) Petronas would be more likely to increase dividend payout to government; and (ii) investment in RAPID is still ongoing until 2019.

NEUTRAL ( ↔ )

• Going forward we understand that Petronas Group will continue to focus more on cost per barrel of oil rather than absolute growth in oil reserves. As a result, we do not expect upstream capex to increase significantly from current level. Nevertheless, we opine that upstream activities are recovering albeit at a slower rate due to recovery of oil prices.

Valuation

• Preferred Pick – Dayang (BUY; TP:RM0.91)

The completion of dividend in specie would remove the overhang delay of relisting of Perdana shares. This would better reflect the value of the group’s stake in Perdana. Earnings recovery is also expected in 2018.

• Preferred Pick – UMWOG (BUY; TP:RM0.44)

Following its latest outstanding quarterly result, we opine that earnings outlook of the company has improved significantly and UMWOG is a major beneficiary of steady jack-up rig demand by Petronas Group given its role as the largest domestic jack-up rig owner. Moreover, recent share price correction has made valuation of the stock more attractive.

Source: Hong Leong Investment Bank Research - 5 Mar 2018