A read-through of Petronas’ 9MFY22 results shows stronger earnings (+159% YoY), thanks to the higher oil prices, with capex spending also higher at RM27.4b (+34% YoY), reflective of the ongoing recovery in activity levels. We believe 4QFY22 capex will be seasonally stronger in order to meet its full-year capex guidance of RM60b. Petronas’ net-cash position currently stands at a healthy RM103b – highest since end-FY18, and hence, we see little difficulty for the group in meeting capex and dividend commitments, which is also expected to be doubled from last year. Meanwhile, the recently concluded 3QCY22 results season was positive for the sector, with no disappointments and 64% of our sector coverage beating expectations. We believe this to be a tell-tale sign that the resurgence of activity levels is beginning to translate into corporate earnings. We maintain OVERWEIGHT on the sector, with top picks including PCHEM and ARMADA.

Strong Petronas’ results thanks to elevated oil prices. Petronas’ 9MFY22 core PATAMI of RM72b (adjusted for net impairments) soared more than double YoY, on the back of favourable average realised prices for major products. As a reference, Brent crude oil price averaged at USD101/barrel in 9MFY22, versus USD70/barrel in 9MFY21. Meanwhile, for the quarter of 3QFY22, core PATAMI of RM29b also came in 27% stronger QoQ, largely thanks to higher volumes from petroleum and petrochemical products, coupled with the favourable impact from foreign exchange.

Higher capex in line with recovery of activities. Petronas incurred a capex of RM27.4b in 9MFY22 – representing a 34% jump, YoY. This is reflective of the overall recovery as activity levels are normalising in a post pandemic era. That said, we expect capex to further pick up in the upcoming 4QFY22 quarter, in order to meet Petronas’ full-year capex guidance of RM60b. We note that 4Q has always been the seasonally strongest quarter for Petronas capex spend over the past few years (as reference, 4QFY21 capex spend constituted 41% of the full year’s capex spend of RM30.5b), and as such, we believe Petronas meeting its own capex guidance figure is still very plausible. Meanwhile, in line with the record high earnings this year, Petronas’ committed dividends of RM50b is double that of last year’s – of which RM25b has already been paid, with the remainder to be paid in the upcoming quarter. Petronas’ net-cash position currently stands at a healthy RM103b (highest it has ever been since end FY18), and hence, we see little difficulty in the group meeting its dividend commitments as well as its capex guidance simultaneously.

Activity levels to continue picking up in the second half of the year. With anticipated further ramp-up in capex by Petronas, we are expecting the upcoming quarters to see a continued recovery trajectory in local activity levels. 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 level of brownfield activities – especially in an environment of higher oil prices as producers would be more incentivised to enhance well productions. Additionally, demand for jack-up rigs is also expected to improve in 2H 2022 and going into 2023– benefitting rig provider VELESTO.

Vastly improved quarter for corporate earnings. Meanwhile, the recently concluded 3QCY22 reporting season saw a vast improvement in corporate earnings. None of the counters within our sector coverage posted disappointing results – versus 30% of our sector coverage in the previous 2QCY22 quarter. More impressively, 64% of our sector coverage managed to beat expectations (versus 30% from the previous quarter). Overall, we see these as tell-tale signs that the higher activity levels in light of the elevated oil prices are beginning to translate into corporate earnings starting this quarter.

Maintain OVERWEIGHT on the sector, underpinned by the healthy oil prices, and anticipation of continued recovery in activity levels, with our current average 2022/2023 Brent crude oil price assumption of USD100/USD90 per barrel (revised downwards from USD110/USD100 per barrel previously amidst slightly milder demand growth assumptions). Current top picks for the sector are PCHEM (OP, TP: RM11.00) and ARMADA (OP, TP: RM0.63).

Source: Kenanga Research - 1 Dec 2022