Petronas recorded 2Q21 core profit of RM8.3bn (+10.1% QoQ, YoY: -RM0.7bn), bringing 1H21 core profit to RM15.8bn (+103% YoY). 1H21 capex spending of RM12.6bn (-14% YoY) was below our expectations, constituting just 32% of our capex forecast of c.RM40bn in FY21. Nevertheless we still expect a higher capex spending in 2H21 due to its good results in 1H21 and higher oil prices. We now moderate down FY21 capex to come in at RM35bn. We make no changes to our Brent crude oil price per barrel assumption of USD70/75 for CY21/22f and maintain our OVERWEIGHT call on the sector. Our top picks for the sector are Bumi Armada (BUY; TP: RM0.80) and Dialog (BUY; TP: RM3.45).

QoQ. Petronas reported 2Q21 core profit of RM8.3bn (+10.1% YoY) driven by higher margins from higher ASP for its petroleum products.

YoY. 2Q21 core profit of RM8.3bn vs core loss of -RM0.7bn in 2Q20 was due to higher margins and ASP from significantly higher oil price YoY.

YTD. Higher 1H21 core profit of RM15.8bn (+103% YoY) was attributable to the same reasons mentioned above.

Capex. Petronas’ capex stood at RM5.9bn (-12% QoQ, -24% YoY) despite better quarterly operating cash flow of RM18.4bn (+28% QoQ, +113% YoY). 1H21 capex of RM12.6bn was below our expectations constituting just 32% of our RM40bn forecast. Nevertheless, we expect Petronas to elevate its capex spending in the coming quarters due to its significantly better YoY results. Nonetheless, we moderate down our forecasted capex to come in at RM35bn in FY21.

Dividend. RM8bn paid so far in 1H21 out of the RM18bn declared.

Oil price forecast. We maintain our Brent crude oil price per barrel forecast at USD70/75 for CY21/22f as we believe that OPEC+ is committed to provide a good equilibrium for oil prices. We view that the increasing demand of O&G from the reopening of economies globally would neutralise OPEC+’s easing of production cuts, providing a stable oil price of around USD70 per barrel in FY21.

Outlook. We expect Petronas to elevate its capex spending in 2H21 as its financial performance has improved significantly and this is expected to benefit most O&G services companies in Malaysia.

Forecast and TP Changes. None

Maintain OVERWEIGHT. 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 impending capex from Petronas in 2H21 albeit not at pre Covid levels, (iv) timeline of vaccine rollouts and (v) the strong economic recovery from China, US and Europe. Our top picks for the sector are Bumi Armada (BUY; TP: RM0.80) for its strong FPSO business and fast improving balance sheet and Dialog (BUY; TP: RM3.45) as we believe that its share price has bottomed out and its growth in sustainable earnings and potential for further expansions for its tank terminals business will provide upside for the Company.

Source: Hong Leong Investment Bank Research - 30 Aug 2021