A read-through of Petronas group’s FY21 results shows a strong set of earnings, underpinned by higher average realised prices throughout the year – in tandem with the strong crude oil prices. However, capex spending still remains low, with 2022 capex at only RM30.5b – its lowest in over two decades, and falling short of its earlier guidance of RM39-40b for 2022. This was due to the prolonged movement restrictions and supply chain disruptions, which prevented the group from executing its intended capital investments. Nonetheless, activities have been picking up, and as such, we are expecting to see a rebound in capex spending as early as 1H22. That said, we are also anticipating Petronas’ 2022 capex to normalise back to RM40-50b. Meanwhile, Petronas had paid out a total of RM25b dividends in 2021. Given the high oil prices, we are expecting dividends to stay at least level YoY for 2022, backed by its healthy net-cash position of ~RM67b. Overall, we maintain our OVERWEIGHT stance on the sector, with a higher 2022 average Brent crude oil price assumption of USD90 per barrel (from USD65 previously) on the back of supply disruption fears following the unfolding of Russia’s invasion into Ukraine. For stock selections, we have highlighted PCHEM and HIBISCS as picks to benefit from the high oil prices, and DAYANG and UZMA as beneficiaries from the recovery of local activity levels.

Strong FY21 results. Petronas group recorded FY21 core PATAMI of RM39.5b (arrived after adjusting for net impairments) – more than quadrupled YoY, largely thanks to the higher average realised prices throughout the year. This is in tandem with the strong oil prices, with Brent crude averaging at USD71/barrel in 2021, versus USD43/barrel in 2020. Similarly for the quarter of 4QFY21, Petronas’ core PATAMI of RM13b continued to grow a further 6% sequentially and turnaround from losses in 4QFY20, thanks to the higher average realised prices.

Capex spending at a low. Petronas 2021 capex spending came in at RM30.5b – falling short of its earlier guidance of RM39- 40bil capex for 2021. This was even lower than 2020 capex of RM33b, and these two years makes up the lowest capex spent by the company thus far in over two decades. Petronas cited this was due to projects being affected by the prolonged movement restrictions coupled with supply chain interruptions, resulting in the group unable to incur capital spending as originally intended. Nonetheless, with the re-opening of borders and ease of traveling, activities have been picking up since early 2022. With that said, we expect 2022 Petronas capex to normalise back to the range of RM40-50b, with a rebound to be seen as early as 1H22. In light of its energy transition agenda, the group is also guiding that ~20% of its capex for the next five years will be allocated for new energy and zero carbon initiatives. Nonetheless, we still expect upstream spending to remain its largest area of investment. As for dividends, the group had paid out a total of RM25b in 2021 – representing the third year of decline. In tandem with the higher oil prices, we are also expecting this to stay at least level YoY for 2022, backed by its healthy net-cash position of ~RM67b.

Anticipated recovery in activity levels. With an anticipated pick up in Petronas’ capex spend going forward, local activity levels are also expected to see some mild recovery. Earlier in our read-through of Petronas’ latest activity outlook, we have highlighted DAYANG to be one of the key beneficiaries, given the planned increase in offshore maintenance, construction and modification (MCM), and hook-up and commissioning (HUC) works. Meanwhile, we believe UZMA could also benefit from the increased levels of brownfield activities – especially in an environment of higher oil prices as producers would be more incentivised to enhance well productions.

Maintain OVERWEIGHT on the sector. With the unfolding of the Russia’s invasion of Ukraine, Brent crude prices have jumped over USD100/barrel in light of fears supply disruption. Note that Russia contributes to ~10% global oil supply. This managed to more than offset expectations of a slight global oversupply in 2022 under a “no war” status quo scenario. Meanwhile, the OPEC+ alliance is expected to continue sticking to its planned supply increase of 400k barrels per day (bpd) – with no plans of further increasing output (at least for now), which could further exacerbate global supply disruption fears. With all things considered, we raised our 2022 average Brent crude oil price assumption to USD90/barrel (from USD65 previously). Sector picks for the moment include PCHEM (OP, TP: RM11.00) and HIBISCS (Not Rated) as proxies for the high oil prices, as well as DAYANG (OP, TP: RM1.00) and UZMA (OP, TP: RM0.68) as beneficiaries of the recovery in local activity levels.

Source: Kenanga Research - 2 Mar 2022