Petronas posts weaker 3QFY19 results. Petronas group posted 3QFY19 core PATAMI of RM8.4b (arrived after stripping-off net impairments), declining 33% YoY, dragged by lower average realised prices, coupled with lower sales volumes mainly for crude oil and condensates. This was partially offset by the weakening Ringgit. Sequentially, 3QFY19 also declined 33% QoQ due to the lower averaged realised prices coupled with lower production volumes. Meanwhile, cumulatively, 9MFY19 saw a marginal drop in core PATAMI by 4%, also due to lower average realised prices, partially offset by the weakening Ringgit.

Lower dividends for 2020? YTD, Petronas has thus far paid RM25b out of the RM30b special dividends declared, as well as RM15b out of RM24b ordinary dividends declared, with all remaining dividends expected to be paid out in October to November 2019. However, the group has yet to announce any dividends in relation for FY19, and hence, we believe dividend payments could be lower for 2020. This comes after the group had already paid an especially higher dividend in 2019, in the form of the aforementioned RM30b special dividend declared.

Higher capex expected going forward? The national oil major’s capital investments for 3QFY19 amounted to RM12b, bringing cumulative YTD-9MFY19 capital investments to RM26.5b, most of which is attributable to upstream projects (46%). Geographically, more than half (54%) of YTD capex was spent locally in Malaysia. However, with the group targeting a full-year capex of ~RM50b, we expect investments to be back-loaded towards the last quarter of the year, with continued focus on upstream. A similar trend could also be seen in 2018, where a huge part of the year’s capex was back-loaded into 4QFY18.

Value-chains to benefit from higher Petronas capex. We believe potential value-chains that could emerge as beneficiaries from continued elevated capex spend from Petronas include 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. Meanwhile, higher upstream activities could also benefit offshore maintenance players (e.g. DAYANG, CARIMIN), vessel providers (e.g. PERDANA, ALAM, COASTAL, ICON), as well as production enhancement players (e.g. UZMA, DESTINI). 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. That said, we look towards the upcoming Petronas’ Activity Outlook report (expected release in 1-2 months) for further guidance on job flows within the oil and gas space.

Maintain NEUTRAL, given limited upsides to large-cap Petronas-related counters (expect for MISC), albeit with increased sanguinity over the sector, especially for service and equipment providers. Favouring a more defensive stance, our sector top picks for the 4QCY19 quarter includes: (i) MISC, given its resilient dividends providing stock defensiveness, and (ii) SERBADK, for its consistent track record of earnings growth delivery, although several thematic revivals, especially heavily bashed down stocks within the sector over the past several years, could come into play amidst increased activities from Petronas, thus providing some trading opportunities.

Source: Kenanga Research - 27 Nov 2019