Petronas recorded a decent 4Q22 core net profit of RM21.7bn (-24% QoQ, +87% YoY). This brought the group’s FY22 core earnings to RM94.1bn (+137% YoY). Petronas has paid out total dividends of RM50bn for 2022 and has slightly lowered its dividend commitment to RM40bn for 2023. Petronas’s FY22 capex stood at RM49.7bn, in-line with its better operating cash flow s of RM135.3bn, albeit falling short of its 2022 target of RM60bn – as per guided previously. We are projecting a capex of RM40bn for 2023. We make no changes and maintain our Brent crude oil forecast of USD85-90/bbl for 2023 (EIA: USD83/bbl). Post earnings season, we downgrade the Oil & Gas sector to NEUTRAL (from OVERWEIGHT previously) with Dagang Nexchange (BUY; TP: RM1.03), Bumi Armada (BUY; TP: RM0.87) and Dialog (BUY; TP: RM2.80) as our revised top picks.

Declining profits – in tandem with the movement of crude oil and gas prices.

Petronas recorded a decent 4Q22 core net profit of RM21.7bn (-24% QoQ, +87% YoY). This brought the group’s FY22 core earnings to RM94.1bn (+137% YoY) – after having adjusted for RM1.8bn of net impairment losses done throughout the year.

QoQ. Petronas’s 4Q22 core net profit declined by 24% QoQ and we believe that this was mainly due to lower average realised product prices throughout the quarter – where Brent averaged at USD89/bbl in 4Q22 as compared to USD97/bbl in 3Q22. However, the weaker QoQ performance was slightly mitigated by: (i) higher LNG sales volume of 5%; (ii) an increase downstream petroleum products sales volume of 14%; and (iii) higher crude oil sales volume of 17%.

YoY. Petronas’s 4Q22 core net profit almost doubled YoY (+87% YoY) to RM21.7bn on the back of: (i) favourable average realised prices for all of the group’s products, which we believe stems from higher average realised product prices throughout the quarter – where Brent averaged at USD89/bbl in 4Q22 (as compared to USD80/bbl in 4Q21); and (ii) higher production and sales volume across all of its major business divisions – upstream, gas and downstream segments.

YTD. Petronas’s FY22 core net profit rose +137% YoY to RM94.1bn largely due to favourable average realised prices for all products. Brent crude oil averaged at USD99/bbl in FY22 (vs. USD71/bbl in FY21).

Dividend. Petronas has paid out total dividends of RM50bn for 2022 and has lowered its dividend commitment to RM40bn for 2023. While we think Petronas’s profits and cash flows would normalise in 2023 in tandem with lower average crude oil price assumption throughout the year, we believe that the dividend commitment of RM40bn is highly doable. Petronas’s net cash position continued to improve, further growing to RM97.1bn as at end-December 2022 from RM56.7bn as at end-December 2021 (Figure 4).

Capex. Petronas’s FY22 capex stood at RM49.7bn (+63% YoY), in-line with its better operating cash flows of RM135.3bn (+72% YoY), albeit falling short of its 2022 target of RM60bn – as per guided previously. We are projecting a capex of RM40bn for 2023. 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 USD85-90/bbl for 2023 (EIA: USD83/bbl). YTD, Brent averaged at USD84/bbl. Meanwhile, Petronas expects Brent crude oil to average at USD80/bbl for the year.

Downgrade Oil and Gas sector to NEUTRAL (from OVERWEIGHT). We still think that 2023 will be a golden year for the oil and gas service providers (OGSE players) – a laggard to the elevated oil price environment for the past year. Our revised top picks for the sector are: (i) Dagang Nexchange (BUY; TP: RM1.03) as we have reasons to believe that the worst may already be over for them. We are also wagering on a positive outcome for the ongoing arbitration with CGP and we look forward for timely update on the potential JV with Foxconn on a 12-inch wafer fab in Malaysia; (ii) Bumi Armada (BUY; TP: RM0.87) given its foothold in the FPSO business which provides steady recurring income, coupled with speedy enhancement in its debt profile and undemanding valuations and its potential new Cameia FPSO job win from Total Energies; and (iii) Dialog (BUY; TP: RM2.80) for its recurring income type of business model and potentially new sizeable dedicated tank terminal job win in Pengerang in the near term.  

We have decided to downgrade the Oil & Gas sector to NEUTRAL (from OVERWEIGHT previously) after our revised recommendations post-earnings season on: i) Petronas Chemicals (SELL; TP: RM6.54) as we view that the petrochemical super-cycle is now behind us as product spreads are seen to be coming off their respective peaks; ii) Petronas Dagangan (SELL; TP: RM19.12) as we think that the group’s share price have gone past its fundamentals and we believe that the risk -to reward ratio is not justified as valuations are rich at forward P/E multiples of close to 30x; and iii) Velesto Energy (SELL; TP: RM0.21) as valuations are also rich and we think that the group’s strong turnaround prospects and growth trajectory ha ve already been priced in.

Source: Hong Leong Investment Bank Research - 14 Mar 2023