Petronas recorded FY20 core loss of RM7.9bn (-84% YoY) on lower demand and price of crude oil and LNG. FY20 capex spending of RM33bn (-27% YoY) was broadly in-line with our expectations of c.RM35bn, constituting just 83% of its targeted capex spending of c.RM40bn in FY20. Despite its weaker performance in FY20, we believe that the worst is over for Petronas and we anticipate its capex for FY21 to recover by 21% to c.RM40bn due to higher O&G prices and the recovering Malaysian economy. We upgrade our Brent crude oil price per barrel assumption from USD55/60 for FY21/22f to USD60/65 and upgrade our sector call to OVERWEIGHT. Our top picks for the sector are PCHEM (BUY; TP: RM8.40) and Bumi Armada (BUY; TP: RM0.75).

QoQ. 4Q20 core loss of -RM1.4bn (QoQ: RM1.5bn) was due to lower margins from lower ASP for its petroleum products.

YoY. Revenue declined by 31% YoY due to lower ASP for crude oil, condensates and LNG. Subsequently, the Company recorded a core loss of -RM1.4bn (from RM9.2bn).

YTD. FY20 core earnings declined by 84% YoY on average lower benchmark prices for all products on the back of lower sales volume mainly for sales gas, petroleum products and LNG.

Capex. Petronas’ capex fell 17% short of its RM40bn target, coming in at RM33bn due to lower crude oil prices as a result of the Covid-19 pandemic. Going forward, we believe that Petronas will be able to lift its capex due to the higher oil price trend of late and the timeline of vaccination rollouts. We believe that Petronas’ capex for FY21 would come in 21% higher at c.RM40bn.

Dividend. Declared dividend of RM34bn (from RM54bn in FY19) for FY20 despite OCF declining by c.RM50bn YoY. We believe that there should be less pressure for higher dividend payouts from Petronas in FY21 if the Malaysian economy recovers quicker than anticipated.

Oil Price forecast. We upgrade our Brent crude oil price per barrel forecast from USD55/60 for FY21/22f to USD60/65 based on the following reasons: (i) OPEC+’s commitment to provide a good equilibrium for oil supply, (ii) the timeline and efficacy of vaccine rollouts leading to significantly higher oil demand in 2H21 (could neutralise OPEC+’s easing of production cuts), (iii) the freezing temperatures in Texas has affected most shale oil producers in the Permian basin and it could impede US’ future oil supply as it might be an onerous task for shale producers to resume production at full capacity, (iv) the massive under-investments on O&G capex from oil majors like Exxon, Shell and Chevron would lower the future supply of oil and (v) the strong economic recovery in China is expected to offer a strong support for oil prices.

Forecast and TP changes. No changes made post 4QCY20 results.

Upgrade to OVERWEIGHT (from Neutral). We believe that the fundamentals of the O&G sector are turning positive, with (i) higher oil prices, (ii) stronger commitment from OPEC+ to keep oil prices afloat, (iii) higher capex from Petronas in FY21 albeit not at pre-Covid levels, (iv) timeline of vaccine rollouts and (v) the strong economic recovery from China. We currently have 6 buy calls, 4 hold calls and 1 sell call. Our top picks for the sector are PCHEM (BUY; TP: RM8.40) as we expect its strong ASP trend for most of its products to continue and Bumi Armada (BUY; TP: RM0.75) for its strong FPSO business and fast improving balance sheet.

Source: Hong Leong Investment Bank Research - 1 Mar 2021