- Petroliam Nasional Bhd's (Petronas) group chief executiveofficer Datuk Shamsul Azhar Abbas has said that the group plans to lower itsannual dividend to the government by RM2bil to RM28bil this year. This is toenable the group to retain sufficient reserves to invest further in explorationagainst the backdrop of the country's declining oil & gas production.

- Shamsul had also indicated last year that Petronas wishedto cap its dividend payout to 30% of its CY13F net profit, vs. 55% in FY11, 74%in FY10 and 57% in FY09. Including royalties and taxes, Petronas' paymentsamounted to RM66bil (See Chart 1) or 36% of the government's 2011revenues. 

- While Petronas' capex has declined by 21% from the peak ofRM44bil in FY09 to RM34.9bil in FY11 (See Chart 2), this stemmed largely fromthe aftermath of the 2008-2009 global financial crisis and project defermentsamid the resulting turbulence in crude oil and raw material prices, rather thanfrom any group cash flow issues.

- It is uncertain whether the government will agree toPetronas' dividend reduction request, given the government's efforts to narrowthe budget deficit. But given Petronas' net cash pile of RM112bil andshareholders' funds of RM288bil as at 31 December 2011 and operating cash flowsof RM71bil in FY ended March 2011, we do not expect the group's capex plans to besignificantly affected if the government did not approve Petronas' proposal forthis year.

- Petronas spent RM41bil in capital expenditures in CY11 andRM34.9bil in FY ended March 2011. Given that Petronas is committed to spendRM300bil in 2011-2015, the capital expenditure in 2011 was 32% below thegroup's average annual spending target. 

- Hence, we remain convinced that Petronas is poised toreaccelerate its contract rollouts over the next few months to meet the deadlinesof major projects, such as the RM15bil fast-tracked programme to develop gasreserves from a cluster of fields in the North Malay basin, off PeninsularMalaysia, as well as other enhanced oil recovery (EOR) jobs in East Malaysia.The North Malay basin comprises seven fields ' Bergading, Zetung, Gajah,Melati, Kamelia, Angerik and Kezumba.

- Besides the extension of ExxonMobil's EOR projects fromTapis to Seligi, Guntong and Semangkok, Shell is also planning the rollout ofEOR technologies in two oil field projects offshore east Malaysia which couldinvolve an investment of US$12bil (RM38bil) over 30 years. These cover nineoilfields in the Baram Delta, off Sarawak, and four fields in the North Sabah developmentarea.

- We remain excited about the sector given Petronas'  massive capex programme involving EOR,marginal fields and cluster/deep water developments towards maintaining its oil& gas production, while the government remains committed to its EconomicTransformation Programme to create an oil field services hub in the country.Hence, we remain OVERWEIGHT on the sector and retain our BUY calls on MMHE,Bumi Armada, Dialog, SapuraCrest, Kencana Petroleum and Petronas Gas.

Source: AmeSecurities