Petronas’ 1H19 Core Earnings Improved by 12.9% to RM28.7bn on Higher Sales Volume, Stronger USD Against RM, Lower Tax Masking Weaker Average Realised Prices (Brent Prices -6.4% YoY). Capex Spending Had a Slow Start in 1H19 But We Expect to Ramp Up in 2H19 Premising on Unchanged Budget of RM50bn. Balance Sheet Remains Solid With Net Cash Position of RM92.6bn as End of 2Q19 (-3% QoQ; -13% YoY) But Is Expected to Deteriorate in the Next Few Quarters on Its Remaining Dividend Commitment. Reiterate NEUTRAL View on the Sector With Our Preferred Picks Being Sapura Energy (BUY; TP: RM0.35) and CCM (BUY; TP RM2.58).

QoQ: Petronas recorded lower revenue (-4.6% QoQ) dragged by lower average realised prices for major products offset by a stronger USD against RM. Petronas’ 2Q19 core earnings improved by 2.4% to RM14.5bn mainly backed by lower net product and production costs, lower tax expense and finance cost.

YoY: Revenue came in flattish (-0.2%) at RM59.1bn where lower average realized prices for petroleum products and LNG were partially offset by a weaker RM vs. USD and higher volumes for crude oil, condensates and LNG. Core PAT improved by 7.9% aided by lower tax expense (-19.2%).

YTD: Petronas recorded revenues of RM121.1bn (+3.4%) which translated to core PAT of RM28.7bn (+12.9%). Higher interest expense (+8.2%) was offset by lower tax expense (-14.9%) and stronger contributions from JVs and associates (+88%).

Capex. Capex spending as end of 1H19 amounted to RM15.7bn (-10% QoQ; -21% YoY), accounting for 31.6% of Petronas targeted full year capex estimate of RM50bn (+7% YoY). 1H19 capex mix: international with c.RM6.1bn or 39% whilst domestic stood at c.RM9.6bn or 61%. Petronas President Tan Sri Wan Zul highlighted that there will be a ramp up in investment activities in 2H19 with c.RM35bn to be spent (50:50 domestic and international split). With Brent prices hovering above USD60/bbl level (YTD avg c.USD65/bbl), which is in line with Petronas’s crude assumption of USD66/bbl. We can expect Petronas to follow through with its CAPEX commitments. Pengerang Integrated Complex (PIC) recorded overall progress of 99.7% as of 1H19, with initial commercial operations expected to commence in 4Q19.

Dividend. RM14.0bn was paid in 2Q19 (vs RM12.0bn in 1Q19 and RM3.0bn paid in 1Q18) bringing YTD total to RM26bn. Petronas still has c.RM28bn to be divvied to the government in 2019. Petronas’ balance sheet remains solid with net cash position of RM92.6bn as end of 2Q19 (-3% QoQ; -13% YoY) but is expected to deteriorate in the next few quarters due to the special dividend commitment.

Keep NEUTRAL. Reading through Petronas 1H19 report card, commendable profit was delivered on higher production (+1.5%) and entitlement volumes (+4.5%) and forex tailwinds (1H19: RM4.12/USD vs 1H18: RM3.94/USD). Based on the president’s commentary we can expect activities to pick up in 2H19 premising on local upstream allocation estimate of RM17.5bn. Reiterate NEUTRAL view on the sector while keeping our average oil price forecast unchanged at USD68/bbl in 2019. Whilst we believe that there is more upside bias towards oil prices in the near term, given the higher risk premiums resulting from the recent attack in Saudi Arabia, the demand side however face a waning global economy and China-US trade tensions. Our preferred picks are Sapura Energy (BUY; TP: RM0.35) and CCM (BUY; TP: RM2.58).

Source: Hong Leong Investment Bank Research - 23 Sept 2019