Petronas recorded its best ever quarterly performance in the last decade in 2Q22 and 1H22 with core net profits of RM22.5bn (+6% QoQ, +172% YoY) and RM43.7bn (+177% YoY) – mainly due to higher average realised product prices. Petronas has doubled its dividend commitment for 2022 to RM50bn (from RM25bn previously) after having considered a request from the government – which is the second highest ever annual dividend payout (only slightly behind 2019’s level of RM54bn). Petronas’s 1H22 capex stood at RM18.9bn (+48% YoY) in-line with its guidance to increase capex in 2022 to RM60bn – the highest since 2015 and almost double 2021’s capex level of RM30.5bn. We make no changes and maintain our Brent crude oil forecast of USD100-110/bbl for 2022. (EIA: USD105). Maintain OVERWEIGHT on the Oil & Gas sector with DNeX (BUY; TP: RM1.74), Bumi Armada (BUY; TP: RM0.76), Dayang (BUY; TP: RM1.19) and Hibiscus (BUY; TP: RM1.63) as our top picks.

QoQ. Petronas’s 2Q22 core net profit increased by 6% and we believe that this was mainly due to higher average realised prices for its major products, which stems from higher average oil price throughout the quarter of USD112 as compared to USD98 in 1Q22.

YoY. Petronas’s 2Q22 core net profit almost tripled (+172% YoY) to RM22.5bn on the back of favourable average realised prices for all of the group’s products, which we believe stems from higher average crude oil price throughout the quarter of USD112 as compared to USD69 in 2Q21.

YTD. Petronas’s 1H22 core net profit almost tripled as well (+177% YoY) to RM43.7bn due to similar reasons mentioned above. Brent Crude Oil averaged at USD105 in 1H22 (vs. USD65 in 1H21).

Dividend. Petronas has doubled its dividend commitment for 2022 to RM50bn (from RM25bn previously) after having considered a request from the government – which would be the second highest ever annual dividend payout (only slightly behind 2019’s level of RM54bn). The group paid out dividends of RM12bn in 1H22. Petronas’s net cash position improved substantially, further growing by 15% to RM92.5bn as at end Jun 2022 from RM80.3bn as at end-March 2022.

Capex. Petronas’s 1H22 capex stood at RM18.9bn (+48% YoY) in-line with its better quarterly operating cash flows of RM34.6bn (+88% YoY). Recently, Petronas has announced that it will be increasing its capex in 2022 to RM60bn – the highest since 2015 and almost double 2021’s capex level of RM30.5bn. We believe that this would augur well for the local oil & gas sector as most of the listed service providers in the OGSE space are heavily reliant on Petronas as a major client and would serve to be direct beneficiaries of this development.

Oil price forecast. We make no changes and maintain our Brent crude oil forecast of USD100-110/bbl for 2022 (EIA: USD105). YTD, Brent averaged at USD104/bbl. We also introduce our 2023 average Brent crude oil forecast of USD93-98/bbl. On the flipside, Petronas foresees Brent crude oil price to range between USD90 -95/bbl in 2H22, with further normalisation to take place in 2023. However, we note that Petronas tends to be more conservative with its projections and forward -looking statements.

Maintain OVERWEIGHT. Our top picks for the sector are: (i) DNeX (BUY; TP: RM1.74) as it stands to be a direct beneficiary of the elevated oil prices from their Anasuria oil-producing assets and increasing wafer ASPs from Silterra; (ii) Bumi Armada (BUY; TP: RM0.76) given its foothold in the FPSO business which provides steady recurring income, coupled with speedy enhancement in its debt profile; (iii) Dayang (BUY; TP: RM1.19) as it serves to be a direct beneficiary of increasing OSV charter rates and higher guided MCM and i-HUC man hours (from Petronas Activity Outlook 2022); and (iv) Hibiscus (BUY; TP: RM1.63) as we strongly believe that investors have not priced in the exquisite prospects of Hibiscus’s profits and cash flows in the upcoming quarters – mainly from: (i) additional sales and production volumes from the completed acquisition of FIPC (Repsol) assets in Jan 2022; and (ii) significantly higher crude oil prices.

Source: Hong Leong Investment Bank Research - 2 Sept 2022