Petronas' 1Q15 profit after tax declined by 39% yoy to RM11.4bn on lower revenue  (-21%  yoy).  The  lower  profit  is  mainly  due  to  lower  average realised  prices  across  all  products,  partially  offset  by  higher  crude  oil, processed  gas  trading  and  LNG  sales  volume,  and  favourable  US$ exchange  rate  movement  against  the  Ringgit.  Capex  in  1Q15  totalled RM12.1bn, mainly attributable to exploration, development and production capex in Malaysia and Canada, RAPID project in Johor and LNG Train 9 project in Sarawak.

Petronas  president  and  CEO  Datuk  Wan  Zulkiflee  Wan  Ariffin  views  this period of low oil prices as an opportunistic time to re-look Petronas' internal processes  to  achieve  more  cost  savings.  Petronas  has  revised  its  plans and  activities  accordingly,  holding  back  on  expensive  and  high-risk exploration activities and redirecting its resources. Petronas is assuming a range-bound price of around US$55 per barrel for Brent crude oil.

Wan Zulkiflee guided that Petronas is continuing with its 15% cut in capex and  the  25%  cut  in  opex.  For  2015,  Petronas'  capex  would  amount  to around RM70bn, which while higher than the RM60bn spent in 2014, is still lower than what it had originally budgeted for. About RM54bn from the total budgeted capex  would be used for Malaysian projects for both upstream and downstream.  (Source: The Star, Petronas)

Comments:  We  are  pleasantly  surprised  with  Petronas’  RM70bn  capex budget for 2015, which is higher than RM60bn for 2014. While a significant portion of the budget may be spent on the committed major projects that were awarded to foreign contractors (RAPID, Petronas FLNG 1, FLNG 2, Bardegg  2  and  Baronia  EOR),  the  spillover  (of  the  higher  capex)  to Malaysia  oil  &  gas  sector  may  be  larger  than  our  earlier  projection.  We maintain  our  UNDERWEIGHT  call  for  the  oil  &  gas  sector  for  now, anticipating  a  near-term  weakness  in  oil  prices  to  drag  oil  &  gas  share prices, given their strong positive correlations. We shall revisit our earnings forecast and target prices should the domestic oil & gas workflow pick up stronger-than-expected.

Source: Affin Hwang Capital Research - 25 May 2015