Petronas’ FY17 core earnings improved by 27% YoY on the back of better performance from both upstream and downstream segments. Furthermore, thanks to consistent cost optimisation, controllable opex cost softened by 6% YoY and operating cash flow (OCF) in FY17 strengthened by 41%. Moving forward, Petronas will increase its capex spending by 24% to RM55b this year with the oil price assumption of USD52/bbl as well as commit to higher dividend of RM19.0b (vs FY16’s RM16.0b). On the other hand, the recently concluded 4QCY17 results season also demonstrated somewhat better performance with the disappointment ratio at the lowest of 13% in the past three years. The recent oil prices retracement from USD70/bbl to USD62/bbl was not surprising due to the strengthening of USD and rising U.S output. However, we still project a better outlook on; (i) stronger crude demand leading to larger inventory drawdown, and (ii) sustained disciplined production cut by OPEC and non-OPEC members throughout 2018 and beyond potentially. In all, we still prefer counters with strong earnings delivery such as SERBADK, WASEONG, YINSON and DIALOG with opex-related names like UZMA and DAYANG potentially joining the list, riding on higher work orders. Maintain NEUTRAL view on the sector with positive bias.

Petronas delivered better results of FY17 core PAT +27% YoY. Petronas recorded better core PAT of RM17.7b in 4Q17 (+75% QoQ; +30% YoY) RM17.7b thanks to stronger upstream performance (+1.7x QoQ; +6.2x YoY) which led to higher average realised prices recorded (Brent prices +18% QoQ; 24% YoY) masking weaker downstream (-20% QoQ; -3% YoY) and weakening of USD against Ringgit (-2% QoQ; -4% YoY). Cumulatively, FY17 core earnings also improved by 30% to RM46.16b backed by 16% revenue growth due to both better upstream (+9.3x) and downstream (+40%) as a result of higher average realised prices (Brent prices +24%; ICC +31%), strengthening of USD (+4%), and lower well costs write off.

Balance sheet still firm. Overall, in tandem with 16% stronger revenue coupled with widening margins (+4.5 ppts), Petronas’ FY17 EBITDA surged by 31% to RM92.0m. Furthermore, thanks to consistent cost optimisation, we saw its controllable opex cost softened by 6% YoY and operating cash flow (OCF) in FY17 strengthening by 41%. On the other hand, Petronas spent RM10.7b on capex in 4Q17 (-14% QoQ, -26% YoY), bringing its FY17 capex spending to RM44.5b (-12% YoY) of which 53% of it were attributable to committed investment in RAPID (at 84% completion as of December 2017). RM2.0b dividend was paid in 4Q17, bringing its FY17 dividend to RM16.0b, similar to FY16. Petronas has committed to pay higher dividend at RM19.0b this year which is not over stretching to its balance sheet. Overall, net cash position has improved to RM64.1b from RM61.4b as of 3Q17 with widening OCF to capex ratio to 1.7x from 1.4x despite flattish OCF QoQ.

4Q17 Results Round-up. We saw improving set of results in this quarter with five counters, namely DAYANG, GASMSIA, MHB, YINSON and WASEONG, recording earnings surprises while the disappointment ratio were at the lowest in the past three years at 13% vs. 25% in 3Q17. Upstream services players such as MHB and DAYANG surpassed expectations due to higher variation orders and lower operating cost, respectively. Meanwhile, GASMSIA also outperformed on record sales volume. On the other hand, the earnings disappointment largely came from SAPNRG and ALAM, dragged by lower-than-expected work orders and delay of contract award by oil majors. Meanwhile, FPSO players continued to deliver positive set of results driven by incoming and existing long-term FPSO charters. All in, we trim our FY18E earnings by 2% on lower services/charter rates while FY19E numbers were introduced, implying an average growth of 11%. We upgraded MMHE and COASTAL to MP and OP, respectively, as potential laggards backed with undemanding valuations and healthy balance. On the flipside, we downgraded SAPNRG to UP call after the release of disappointing results last December but subsequently upgraded it to OP call given share price retracement of c.30% offering better risk-reward ratio. Lastly, we also downgraded PCHEM to MP as we believe most positives have been priced in.

Retain NEUTRAL with positive bias. The recent oil price retracement from USD70/bbl to USD62/bbl was not surprising due to the strengthening of USD and rising U.S output. However, we still project a better outlook on; (i) stronger crude demand leading to larger inventory drawdown, and (ii) sustained disciplined production cut by OPEC and non-OPEC members throughout 2018 and beyond, potentially. Reading through Petronas’ results, it seems like the local oil giant is coping well in the challenging environment largely attributable to its successful cost cutting measures. Moreover, with the anticipation of better oil prices, Petronas President/Chief Executive Officer, Tan Sri Wan Zulkiflee Wan Ariffin plans to increase its capex spending by 24% to RM55b this year with the oil price assumption of USD52/bbl. All in, we still prefer counters with strong earnings delivery such as SERBADK, WASEONG, YINSON and DIALOG with opex-related names like UZMA and DAYANG potentially joining the list, riding on higher work orders. Keep NEUTRAL view with positive bias on the sector as we are turning more bullish on the upstream space with gradual improvement.

Source: Kenanga Research - 5 Mar 2018