Petronas’ 1Q19 core earnings improved by 19% to RM14bn on higher sales volume, stronger USD against MYR, lower taxes masking weaker average realised prices (Brent prices -5%). Capex spending has a slow start in 1Q19 (- 59% QoQ; -31% YoY) but we expect a ramp up in 2H19 premising on unchanged target of RM50bn. Balance sheet still remains solid with net cash position of RM96bn as of 1Q19 (-9% QoQ; -11% YoY) but is expected to deteriorate in the next few quarters on huge dividend payment. All in, reiterate NEUTRAL view on the sector with our preferred pick being Dialog (BUY; TP: RM3.80) and Sapura Energy (BUY; TP: RM0.43).

QoQ: Petronas recorded lower revenue (-11% QoQ) dragged by lower average realised prices for major products, lower sales volume and weaker USD against MYR. However, Petronas’ 1Q19 core earnings improved by 33% to RM14.2bn mainly backed by lower net product and production costs, lower tax expenses and finances.

YoY: EBITDA increased by 11% led by higher revenue (+7% YoY) on the back of higher sales volume for petroleum products and LNG and strengthening of USD against MYR. Core PAT further increased by 19% to RM14.2bn on lower tax expenses.

Capex. Capex spending had a slow start in 1Q19 (-59% QoQ; -31% YoY), accounting only 17% of Petronas targeted full year capex estimate of RM50bn (+7% YoY). International investment continued to increase by 17% YoY while local capex dropped 44% in 1Q19. While Brent prices are still hovering above USD65/bbl level, which is in with Petronas crude assumption of USD66/bbl, we reckon that Petronas may not revise its budget. Therefore, we shall expect overall capex to ramp up in the next few quarters. Pengerang Integrated Complex (PIC) recorded overall progress of 98.9% as of 1Q19 and is expected to commence its commercial operation in 4Q19.

Cost savings. Petronas overall group costs continued to increase (+5% YoY) in 1Q19 in tandem with higher sales volume. This concurs with our view that services rates are on steady recovery with the anticipation of higher activities. Thus, it may be tough for Petronas to continue to expand its margins.

Dividend. RM12.0bn dividend was paid in 1Q19 (vs RM3.0bn paid in 1Q18). 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. Petronas’ balance sheet still remains solid with net cash position of RM96bn as of 1Q19 (-9% QoQ; - 11% YoY) but is expected to deteriorate in the next few quarters on the dividend payment. Such huge cash outflow, in our view, should not be repeated in order not to jeopardise its future growth.

Keep NEUTRAL. Reading through Petronas 1Q19 report card, commendable profit was delivered with balance sheet staying firm and healthy. We are unsure of whether upstream capex spending actually improved in 1Q19, but we still believe that activities will pick up in 2H19 premising on local upstream allocation estimate of RM15bn. Reiterate NEUTRAL view on the sector while keeping our average oil prices forecast unchanged at USD68/bbl in 2019. Our preferred pick are Dialog (BUY; TP: RM3.80) and Sapura Energy (BUY; TP: RM0.43).

Source: Hong Leong Investment Bank Research - 3 Jun 2019