Petronas’ 1Q18 core earnings improved by 14% YoY, thanks to higher average realised prices recorded (Brent prices +24%, JCC prices +22%) masking weaker performance of USD against Ringgit (-12% YoY). The local oil giant is still on cost-cautious mode, but it seems like the room to squeeze services players’ rates is rather limited as evident by the moderation of its YoY controllable opex cost cut quantum. Moreover, Petronas is likely to deliver its capex spending of RM55b (+24% YoY) this year given that current oil prices (YTD of USD70/bbl) is well above the oil price assumption of USD52/bbl. The recent oil price retracement from USD80/bbl to USD76/bbl was not surprising on the expectations that OPEC, Russia and other producers may uplift production cap in the upcoming OPEC meeting in Vienna end of next month. We opine that OPEC would need to gradually lower its production cut quantum beyond 2018 but knee-jerk reactions jerk reactions on crude prices could be expected, in our view, if such news materialise. In all, we still prefer counters with strong earnings delivery such as SERBADK, YINSON and DIALOG while stocks which are highly correlated to oil prices such as ARMADA and SAPNRG are likely to stay volatile in the near term. Keep NEUTRAL view on the sector.

Petronas’ 1Q18 PAT up 14% YoY. Petronas’ core earnings in 1Q18 after stripping off RM1.1b net impairment write-back improved by 14% YoY to RM11.9b from RM10.5b in 1Q17, thanks to higher average realised prices recorded (Brent prices +24%, JCC prices +22%) masking weaker performance of USD against Ringgit (-12% YoY). Sequentially, Petronas’ core PAT was down 33% from RM17.7b in 4Q17 in tandem with revenue falling 6% largely bogged down by lower sales volume of petroleum products, crude oil & condensate and weakening of USD against Ringgit offsetting impact of higher average realised prices (Brent prices +9% QoQ, JCC prices +25% QoQ).

Balance sheet still firm. Overall, despite revenue declining by 6%, Petronas’ 1Q18 EBITDA inched upwards by 2% to RM25.0b on widening margins (+3.3 ppt). Besides that, we saw its controllable opex cost softened further by 1% YoY (vs -6% in FY17) and operating cash flow (OCF) in 1Q18 strengthening by 22%. On the other hand, Petronas spent RM12.0b on capex in 1Q18 (+12% QoQ, flat YoY) of which 36% of it was attributable to committed investment in RAPID (at 90% completion as of April 2018). RM3.0b dividend was paid in 1Q18 (vs RM2.0b in 4Q17, none in 1Q17). Petronas has committed to pay higher dividends at RM19.0b this year (vs RM16.0b in FY17). This is not over stretching to its balance sheet as its net cash position stood at RM100.1b as of 1Q18.

1Q18 results round-up. Pending the announcement of ARMADA’s 1Q18 results today, which is the last counter of our sector coverage to release its report card for 1QCY18, we are likely to see deteriorating performance with lower number of outperformers (2 vs 5 in 4Q17), namely DIALOG and SAPNRG beating our expectations. Meanwhile, the disappointment ratio was also higher at 31% (assuming ARMADA results came within expectations) vs. 13% in 4Q17 even with the anticipation of 1Q18 being a seasonally weak quarter. Upstream services players such as ALAM, COASTAL and DAYANG missed expectations due to stubborn fixed costs amidst unsatisfactory vessel utilisation. GASMSIA and PETDAG also had a soft start dragged by higher product costs and sliding sales volume. Following higher number of underperformers, we trimmed target price for six counters within our core coverage but only downgraded PETDAG to MP call given the disappointing 1Q18 and 9% YTD price appreciation.

Retain NEUTRAL. The recent oil price retracement from USD80/bbl to USD76/bbl was not surprising on the expectations that OPEC, Russia and other producers may uplift production cap in the upcoming OPEC meeting in Vienna end of next month. We opine that OPEC would need to gradually lower its production cut quantum beyond 2018 but short-term knee-jerk reactions on crude prices could be expected, in our view, if such news materialise. We are maintaining our average FY18 crude prices at USD65/bbl (vs average USD70/bbl YTD) with upside revision bias premising on; (i) stronger crude demand leading to larger inventory drawdown, and (ii) continuous disruption from Venezuela, (iii) prolonged shale production capacity cap, and (iv) sustained disciplined production cut by OPEC and non-OPEC members throughout 2018. Reading through Petronas’ results, the local oil giant is still on-cost cautious mode, but it seems like the room to squeeze services players’ rates is rather limited as evident by the moderation of its controllable opex cost cut quantum. Moreover, Petronas is likely to deliver its capex spending of RM55b (+24% YoY) this year given that current oil prices (YTD of USD70/bbl) is well above the oil price assumption of USD52/bbl. All in, we still prefer counters with strong earnings delivery such as SERBADK, YINSON and DIALOG while stocks, which are highly correlated to oil prices such as ARMADA and SAPNRG are likely to stay volatile in the near term. Keep NEUTRAL view on the sector.

Source: Kenanga Research - 31 May 2018