A read-through of Petronas’ 1H19 results highlighted that the group posted stronger core PATAMI by 14% YoY, helped by higher sales volumes and weakening Ringgit, while partially offset by lower average realised prices and higher product costs. YTD, capex spend amounted to RM15.7b, with focus on upstream and local investments. However, the group’s full-year capex projection of RM50b remains intact, and as such, we expect investments to be back loaded into 2H19. Of the ~RM35b expected upcoming capex, we expect a 50-50 split between local and international investments, with continued focus on upstream. Meanwhile, the group had also paid out RM26b out of the RM54b dividends declared for the year. That said, with Petronas sitting on a net-cash pile of RM92.6b, we see little hassle for the remaining RM28b dividends to be promptly paid out within the year. Nonetheless, with the group yet to announce any dividends in relation to FY19, we expect dividend payment to be lower in 2020. Overall, with continued capex for the upstream segment, we believe potential value-chains to be highlighted include the drilling space (e.g. VELESTO), fabricators (e.g. SAPNRG, MHB), as well as FPSO players (e.g. YINSON, MISC) that could benefit from the sanctioning of greenfield investments. We maintain NEUTRAL on the sector, with earnings delivery and balance sheet resilience still remaining our key selection criteria. Preferred picks for the upcoming quarter include: (i) MISC, given its defensive dividends, and (ii) SERBADK, for its consistent track record of earnings growth delivery.

Petronas posts stronger 2Q19 results. Petronas group posted 2Q19 core PATAMI of RM12.7b (arrived after stripping-off net impairment write-backs), jumping 11% YoY, primarily helped by the weakening Ringgit and lower effective tax rates, offset by higher product costs and lower average prices. Sequentially, 2Q19 core PATAMI grew 5.5% QoQ, similarly due to the weakening Ringgit and lower finance costs, partially offset by the lower average realised prices. Cumulatively, 1H19 recorded core PATAMI of RM24.7b, being 14% higher YoY, helped by the higher sales volumes and weakening Ringgit, partially offsetting lower average realised prices and higher product costs.

Higher capex expected for 2H19. For 1H19, Petronas incurred total capex of RM15.7b, mainly for the upstream sector (43%), with most of the total capex (61%) being incurred for local projects. That said, Petronas guides that its full-year capex projection of RM50b remains intact, with investments being back-loaded towards the 2H of the year. Of the approximately ~RM35b capex expected for the remaining of the year, we expect a 50-50 split between local and international investments, with focus to remain on the upstream segment. Meanwhile, the group has also paid out RM22b of the RM30b special dividends declared for 2019, whilst RM4b of the RM24b ordinary dividends in relation to FY18 have also been paid thus far. Moving forward, given Petronas’ net-cash pile of RM92.6b, the remaining dividends of RM28b (RM8b special, and RM20b ordinary) should be promptly paid out within the year. Thus far, the company has yet to announce dividends for FY19, and as such, we believe dividend payments could be lower for 2020 – normalised from a high of RM54b in 2019 (RM30b special, and RM24b ordinary).

Value-chains highlight. Given Petronas’ capex expected to increase in the 2H of the year, with continued focus towards the upstream segment, we believe potential value-chains that could emerge as beneficiaries would include the drillers (e.g. VELESTO), fabricators (e.g. SAPNRG, MHB), as well as FPSO players (e.g. YINSON, MISC) which could benefit from sanctioning of greenfield investments. Nonetheless, we believe cost optimisation will still be highly relevant for Petronas, and hence, we continue to expect intensified bidding competition and lower margins for upcoming job awards.

Maintain NEUTRAL. Top-picks for the sector for the upcoming quarter include: (i) MISC, given its resilient dividends providing stock defensiveness, and (ii) SERBADK, for its consistent track record of earnings growth delivery. While we acknowledge that the oil and gas sector may have already begun its bottoming out process given the increased activities and contract flows especially within the upstream space, we believe a full recovery could still be long and gradual for many players given their balance sheet constrains. As such, we advocate more selective approach towards stock picks within the sector, favouring names with earnings delivery and resilient balance sheets, coupled with acceptably decent valuations.

Source: Kenanga Research - 23 Sept 2019