Kenanga Research & Investment

Oil & Gas - Petronas Bounced Back to Profitability

Publish date: Tue, 01 Jun 2021, 09:39 AM

QoQ, Petronas bounced back into profit (reversing from losses last quarter), registering core PATAMI of RM7.5b, mainly driven by improvement in product prices and lower opex, offsetting poorer sales volumes. In tandem with the improved results, the group’s net-cash position also strengthened 6% during the quarter to RM55b, although we note that this is still less than half from end-FY18 of RM117b. Petronas is still expected to continue its RM18b dividend payments in FY21 (of which RM2b had already been paid), which is significantly lower than the RM34b paid in FY20. Meanwhile, capex spending dropped 39% QoQ/21% YoY to RM6.7b in 1QFY21 amidst project delays given the movement restrictions, with upstream still the largest area of investment. This is contradictory to Petronas’ earlier guidance of ramping up annual capex to RM40-45b for the next five years (from FY20 capex of RM33.4b). As such, we believe the prolonged pandemic amidst surge in Covid-19 cases, coupled with stricter movement restrictions, may pose as challenges for Petronas to ramp up activity levels for the time being. This could have a trickle-down effect to local-centric contractors possibly seeing a continued slowdown in jobs. Maintain NEUTRAL on the sector.

Petronas bounced back from losses, QoQ. Petronas recorded 1QFY21 core PATAMI of RM7.5b (arrived after adjusting for net impairments). YoY, this represents a 20% decline, amidst lower sales volumes and a stronger Ringgit, offsetting lower opex during the quarter. QoQ, its 1QFY21 turned around from losses in 4QFY20, largely helped by improved product prices and lower opex, offsetting lower sales volumes.

Slight improvement in net-cash position, continues to stick to lowered dividends. In tandem with the improved results, Petronas’ net-cash position has also improved 6% during the quarter to RM55b. However, we do note that this is still less than half from RM117b in end-FY18. Nonetheless, Petronas is expected to continue its FY21 dividend payment commitment of RM18b (of which RM2b has already been paid during the quarter), which is significantly lower than the RM34b paid in FY20.

Drop in capex spending. During the quarter, Petronas’ incurred capex of RM6.7b, with upstream still remaining the largest investment area at 39%. This represents a decline of 39% from 4QFY20, and 21% from 1QFY20 levels, primarily due to project delays and re-phasing of activities resulting from the movement restriction orders. This is in contradiction to the group’s earlier guidance where it seeks to ramp up its annual capex to RM40-45b for the next five years (versus FY20 capex of RM33.4b). Nonetheless, given the current rise in Covid-19 cases, and tightened movement restrictions, we believe it could be challenging for Petronas to ramp up its capex activities at this juncture. We believe this could have a trickle-down effect, and hence, we may see continued slow activity levels for local-centric contractors for the time being.

Overall a satisfactory results quarter. Reviewing the just-concluded results season, we deem the quarter to be overall a satisfactory one results-wise, although SERBADK’s issue with its auditors was a huge negative surprise. That said, many of the downstream and E&P players (e.g. PCHEM, PETDAG, HIBISCS, LCTITAN) posted outstanding results, benefiting from the surge in crude oil prices during the quarter, which resulted in supernormal product margins and spreads. Nonetheless, with oil prices stabilising, we believe margin spreads will be more normalised in the next quarter, especially for names with floating feedstock costs (e.g. LCTITAN, PETDAG). Meanwhile, local contractors (e.g. DIALOG, DAYANG, UZMA, VELESTO) suffered from slower activity levels during the quarter. We believe with the suppressed Petronas capex spending and stricter movement restrictions, many local contractors could still suffer from a momentary jobs drought.

Maintain NEUTRAL, as activity levels are not realistically expected to revert to pre-pandemic levels anytime soon, while company fundamentals still largely remain weak. No outright top picks for the sector at the moment, although bargain hunters may look at ARMADA and UZMA as trading plays given their attractive valuations.

Source: Kenanga Research - 1 Jun 2021

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