Petronas posted a record FY22 core PATAMI of RM94b (more than doubled YoY) on the back of higher product prices and favourable forex impact. Its capex investments jumped 65% YoY to RM50.1b, with upstream remaining the key focus. Going forward, Petronas guided for a capex of RM300b for the next five years (or an average of RM60b per year) to further spur hydrocarbon activity levels as well as investments in green energy. The dividend to the government in 2023 is projected at RM40b (vs. RM50b in 2022). With cash coffers of RM108b (the highest since FY18), it will have little difficulty meeting both its dividend and capex commitments. The further rampup in its capex augurs well for local activity levels, benefitting equipment and service providers e.g. DAYANG (OP; TP: RM1.90), UZMA (OP; TP: RM0.90) and VELESTO (UP; TP: RM0.19). Meanwhile, our universe of oil & gas stocks reported satisfactory 4QCY22 results (although a number of players disappointed) backed by elevated activity levels, partially dented by cost inflation. We downgrade the sector to NEUTRAL from OVERWEIGHT as we see limited upside catalysts for big-cap Petronas names, though we continue to see opportunities in smaller equipment and service contractors. We maintain our 2023-2024 Brent crude oil price assumption of USD80/barrel.

Record Petronas earnings. Petronas’ FY22 earnings surged to a record high, posting a core PATAMI of RM94b (adjusted for net impairments) – coming in more than doubled from last year. This was on the back of higher averaged realised prices for all products as oil prices remained strong, coupled with the favourable impact from foreign exchange.

Huge surge in Petronas capex. Petronas also saw a huge surge in its capex investment in FY22, with the group’s total capex of RM50.1b in FY22 representing a 65% jump YoY from RM30.4b. As before, upstream spending still remained as the group’s largest area of investment. Also as previously anticipated, the group’s capex spending was heavily backloaded to the tail-end of the year, with the 4QFY22 individual quarter alone incurring a capex of almost RM23b – making it one of the highest capex spending from the group on a quarterly basis. Going forward, Petronas is guiding a capex spending of RM300b for the next five years of FY2023 – FY2027 (thus averaging to ~RM60b per year) – representing a 43% increase from the previous five-year period of RM208.5b. This will continue spurring growth of oil and gas activity levels, while also increasing focus on its clean energy portfolio. Meanwhile, the group has also paid out dividends of RM50b to the government in 2022, as intended. For 2023, Petronas has already committed to a dividend of RM40b to the federal government (which was already slightly revised upwards in the recently tabled revised Budget 2023, from an initial projection of RM35b in the October 2022 version of the national budget tabled under the previous government). Nonetheless, with Petronas’ net-cash position still strong at RM108b (the highest it has ever been since FY2018) on the back of the record-high profit, we see little obstacles for Petronas to meet both its capex and dividend commitments.

Activity levels expected to remain strong. With anticipated further ramp-up in capex by Petronas, we are expecting the upcoming quarters to see continued recovery trajectory in local activity levels. Earlier in our readthrough 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.

Corporate earnings still somewhat satisfactory. The recently concluded 4QCY22 earnings reporting season saw 27% of our sector stock universe missing our forecasts, from nil during the previous quarter. Nonetheless, we still deem it to be an overall satisfactory quarter, as 45% still exceeded expectations, while the remainder met expectations. A continuation from last quarter, we still see recovery of activity levels as one of the central themes during the quarter – benefitting many of the local equipment and services providers, although costs inflation still remains as one of the key concerns. Amongst the key disappointers include: (i) PCHEM (MP; TP: RM7.80), reporting weaker earnings dragged by poorer product ASPs and spreads, coupled with the heightened energy costs, (ii) VELESTO, dragged by the higher project and corporate costs, and (iii) PETRONM (MP; TP: RM4.35), as crack spreads remained weak.

Downgrade sector to NEUTRAL from OVERWEIGHT, as we see limited upside catalysts for big-cap Petronas names (e.g. PCHEM, PETDAG (MP; TP: RM24.00), MISC (MP; TP: RM7.50)), although we continue to see selective opportunities in smaller equipment and service contractors (e.g. ARMADA (OP; TP: RM0.75), DAYANG, WASEONG (OP; TP: RM0.97), YINSON (OP; TP: RM3.65)). Additionally, we are expecting oil prices to gradually trend lower over the long-term from its 2022 high. Our 2023-2024 Brent crude oil price assumption still remains unchanged at USD80/barrel (versus 2022 average of USD99/barrel).

Source: Kenanga Research - 14 Mar 2023