Petronas’ FY18 core earnings improved by 9% to RM51bn on higher average realised prices (Brent prices +31%, JCC prices +33%) masking weaker USD against MYR (-6%). We are pleasantly surprised by the FY19 capex spending target of RM50bn (+7% YoY), which may spur local upstream activities. Meanwhile, the aggressive international expansion would probably benefit the services players with strong international presence. All in, reiterate NEUTRAL view on the sector with our preferred pick being Sapura Energy (BUY; TP: RM0.41).

QoQ: Petronas’ 4Q18 core earnings dropped 26% to RM10.7bn mainly dragged by lower average realised prices for major products, higher taxes (+36%) and finance cost (+1.1x). This was partially offset by higher LNG sales volume, crude oil & condensates.

YoY: Despite revenue increasing by 13%, core PAT fell by 40% largely attributable to weaker downstream (-85%; lower refining and marketing margins) following the decline in oil prices.

YTD: Overall, FY18 core earnings improved by 9% to RM50.6bn on higher average realised prices (Brent prices +31%, JCC prices +33%) masking weaker USD against MYR (-6%). Note that Brent prices averaged at USD71/bbl in 2018, 31% higher than average USD54/bbl in 2017.

Capex. There was a strong backload of capex incurred in 4Q18 (+2.0x QoQ; +90% YoY), bringing its FY18 capex spending to RM46.8bn (+5% YoY). According to the news report, Petronas targeted its capex spending at RM50bn this year (+7% YoY) based on the crude assumption of USD66/bbl in 2019, out which RM30bn is attributable to upstream segment. This is at the higher end of their earlier guidance of RM40bn-50bn range. We reckon that the growth should be coming from international expansion and local upstream segment (RM15bn allocation) given that the largest local downstream project, PIC is at 97% completion as of 4Q18.

Cost savings. Petronas’ FY18 EBITDA surged by 27% to RM116.5bn on widened margin (+6.2 ppts) to 46.4% thanks to consistent cost optimisation amidst better crude environment. However, we opine that it may be tough for Petronas to continue to expand its margins especially when services rates are on gradual recovery mode.

Dividend. RM9.0bn dividend was paid in 4Q18, bringing its YTD total dividend paid at RM26bn (+63%). The estimated recurring dividend of RM24bn and additional special dividend of RM30bn have been and will be paid in tranches between Jan and Nov 2019. Although Petronas’ balance sheet still remains solid with net cash position of RM105bn as of 4Q18, such huge cash outflow has to be one-off in order not to jeopardise its future growth.

Keep NEUTRAL. Reading through Petronas FY18 report card, commendable profit was delivered with balance sheet staying firm and healthy. We are pleasantly surprised by the capex spending target to land at RM50bn this year. This would probably translate into higher activities in the upstream space. Meanwhile, the aggressive international expansion would probably benefit the services players which already have a strong international presence (i.e. Sapura Energy and Yinson Holdings) or companies that are eager to seek overseas growth (i.e. MMHE and Dayang). Reiterate NEUTRAL view on the sector while keeping our average oil prices forecast unchanged at USD68/bbl in 2019. Our preferred pick is Sapura Energy (BUY; TP: RM0.41).

Source: Hong Leong Investment Bank Research - 11 Mar 2019