Petronas’ FY19 core earnings declined by 5.5% to RM47.8bn on lower average realised prices (Brent prices -9.5%, JCC prices 8.7%) offset by a stronger USDMYR YoY. The FY19 capex spending of RM47.6bn is just shy of the RM50bn target. In FY20, Petronas targets capex spending of RM50bn with a higher proportion for domestic capex >10% YoY (c.RM26bn-M28bn), which will maintain FY19’s sector momentum. Reiterate NEUTRAL view on the sector, in view of the current domestic political climate, dampened global economic performance/sentiment against the backdrop of Covid-19 and unresolved US China trade war. We are keeping our average oil prices forecast unchanged at USD60/bbl in 2020. Our preferred pick is Velesto (BUY; TP: RM0.46).

QoQ: Revenues improved by 16% to RM64.0bn QoQ due to the impact of higher sales volumes for crude oil, condensates and LNG. Petronas’ 4Q19 core earnings dropped 8.2% to RM9.2bn mainly dragged by higher tax expense, product costs and higher D&A charges – which we attribute to PIC.

YoY: Revenue declined by 8% YoY due to the impact of lower average realised prices recorded for major products partially offset by higher sales volumes for petroleum products and condensates. Core PAT fell by 14.2% largely attributable to weaker downstream (lower refining and marketing margins) following the decline in oil prices.

YTD: Overall, FY19 core earnings declined by 5.4% to RM47.8bn on lower average realised prices (Brent prices -9.5%, JCC prices 8.7%) offset by a stronger USDMYR (FY19: 4.14 vs FY18. 4.03).

Capex. There was a strong backload of capex incurred in 4Q19 (+1.0x QoQ; +5% YoY), bringing its FY19 capex spending to RM47.8bn (+2% YoY). This is largely in line with Petronas’s targeted capex spending at RM50bn based on the crude assumption of USD66/bbl in 2019. We understand that in FY20, the group has a lower crude oil price assumption of USD50/bbl. We understand that Petronas capex target for FY20 remains at c.RM50bn, with an increase of >10% YoY allocation towards domestic capex to c.RM26-RM28bn. We expect this will translate into higher activities in the upstream space, thus keeping the FY19 momentum for the domestic oil and gas stocks. We reckon that the growth in FY20 should come from international expansion and the local upstream segment given that the largest local downstream project, PIC is now completed.

Dividend. FY19 saw Petronas group divvy out RM59.6bn in dividends (inclusive of the RM30bn special dividend). It declared a dividend of RM24bn for FY19 (vs. RM26bn in FY18), which is the normalized recurring amount. Petronas’ balance sheet remains solid with net cash position of RM73bn as of 4Q19 (vs. RM105bn in 4Q18).

Keep NEUTRAL. Reading through Petronas FY19 report card, despite the tougher operating climate, the group was able to deliver a good profit, meet its targeted capex spend and maintain a solid balance sheet despite the one-off special dividend. Given the higher priority given to domestic capex in 2020, we expect this would translate into higher activities in the upstream space, thus keeping the FY19 momentum for oil and gas stocks. Reiterate NEUTRAL view on the sector, in view of the current domestic political climate, and dampened global economic performance/sentiment against the backdrop of Covid 19 and unresolved US-China trade war. We are keeping our average oil prices forecast unchanged at USD60/bbl in 2020. Our preferred pick is Velesto (BUY; TP: RM0.46).

Source: Hong Leong Investment Bank Research - 27 Feb 2020