Impact NEUTRAL

Measures

• Budget tabled based on 2023 average Brent crude oil price projection of USD90/barrel (versus USD66/barrel in last year’s budget).

• 2023 Petronas’ dividends budgeted at RM35b.

• Government proposes special status for Pengerang, as well as chemical and petrochemical industry investment incentives to develop Pengerang as petrochemical hub.

• Government plans to introduce carbon tax and will study the feasibility of carbon pricing mechanism.

Comments

• Budget’s 2023 average Brent crude oil price projection of USD90/barrel is in-line with our house’s 2023 oil price assumption.

• Petronas’ 2023 budgeted dividends of RM35b will be lower than 2022 of RM50b. This may be a positive for the oil and gas industry as the lowered dividends may facilitate higher capex spending by Petronas, thus leading to improved local activities. Given the strong Petronas results underpinned by the high crude oil prices, Petronas is currently sitting on a strong net-cash position of RM103b – the highest since 2018.

• Proposal of special status and incentives for Pengerang may likely benefit DIALOG which is one of the pioneer key investors of Pengerang – currently sitting on 500 acres of land ready for future development. Further investment interests in Pengerang may also expedite developments for its Pengerang Phase 3 project, which has been earmarked to target mid-to-long-term storage tanker contracts.

• Introduction of a carbon tax will undoubtedly be a negative on the oil and gas industry, although the full impact from this will depend on the extent of the implementation. We reckon this will most likely impact value chains with direct carbon emissions – e.g. oil and gas exploration and development (e.g. HIBISCS), or producer lines (e.g. PCHEM, LCTITAN). Equipment and service provider contractors may be spared from this (as they may not be deemed as direct carbon emitters), but the trickle-down effect from the higher lifting costs per barrel suffered by oil producers may result in margins deterioration. One positive spin on this is that contractors may now be more incentivised to strengthen emissions-friendly solutions in order to gain competitive advantage to differentiate themselves from peers.

Beneficiaries

• Local-centric equipment and service providers - e.g. VELESTO (OP, TP: RM0.16), DAYANG (OP, TP: RM1.30), UZMA (OP, TP: RM0.58), may stand to benefit from the lowered Petronas dividend potentially resulting in higher Petronas capex spending.

• DIALOG (OP, TP: RM3.10) stands out as the key beneficiary for incentives to further develop Pengerang.

Source: Kenanga Research - 8 Oct 2022