Petronas’ net profit plunged 57% YoY to MYR23.8bn on the back of lower realisable product prices, particularly Brent crude and LNG prices. Maintain NEUTRAL on the sector with our Top Picks skewed towards the downstream segment. We are expecting crude oil price to continue to trade in a band of USD45-55/bbl in 2016, which would put a dampener on Petronas’ cash flow.

Profit after tax of MYR23.8bn. Petronas reported lower 9M15 revenue of MYR187.6bn, down 25% YoY, due to lower average realisable prices recorded across all products in line with the downtrend of Brent crude oil and Japanese Crude Cocktail (JCC) for liquefied natural gas (LNG). The lower benchmark prices were slightly offset by higher processed gas trading, crude oil, and condensate as well as petrochemicals sales volume. 9M15 profit after tax (PAT) plunged 57% YoY due to a higher asset impairment of MYR8.8bn and net loss on foreign exchange of MYR23.8bn from MYR54.9bn. For 3Q15, Petronas paid the Malaysian Government another MYR7bn in dividends for a cumulative total of MYR20bn, which means another MYR6bn would be paid in the fourth quarter of the year. For 2016, Petronas is expected to pay MYR16bn, a 38% decrease of revenue to the Government in light of the lower crude oil and LNG prices. YTD, capex spending at MYR49.7bn was attributed to: i) the acquisition of Statoil’s Shah Deniz assets, ii) upstream capex, as well as iii) the refinery and petrochemicals integrated development in southern Johor.

Production numbers. Total production volume for 2015 came in at 2,278 thousand barrels of oil equivalent per day (boepd), higher by 97 thousand boepd due to enhanced production as well as a new production stream coming on line. LNG sales volume came down 1% YoY due to lower production from the Bintulu LNG complex. YTD, Brent averaged USD56.7/barrel (bbl) while LNG imports to Japan up to August, averaged at USD11/million metric British thermal units (mmbtu). On its balance sheet, Petronas is still in a net cash position of MYR62.3bn.

Maintain NEUTRAL on the sector. We are maintaining our NEUTRAL recommendation on the Malaysian oil & gas sector. We are forecasting Brent to average USD50/bbl in 2016 as the oversupply situation in the market still remains unresolved but we are expecting a mild recovery in 2017; we forecast crude oil price to average USD60/bbl as we expect the supply and demand dynamics of the crude oil price market to balance itself out. Our BUY recommendation is skewed towards downstream plays with our Top Pick being Petronas Chemicals (PCHEM MK, BUY, TP: MYR7.56). The petrochemical company continues to be a beneficiary of a strong USD, the lack of major turnarounds, strong cash generating ability as well as its foray into specialty chemicals.

Dividend and capex still higher than operating cash flow. In Figure 3 below, we show that Petronas’ operating cash flow is lower than its dividend plus capital expenditure. Also we did not include in our dividend amount of MYR20bn shown in the chart the MYR6bn that is expected to be paid by Petronas to the Government in 4Q15. Petronas already lowered its dividend payment promised to the Government in 2016 to MYR16bn. In terms of capex, Pacific Northwest LNG is a priority and expected to incur a total investment of USD36bn (MYR151bn) over the next four years, coupled with investments in RAPID (cost of investment USD27bn); we believe Petronas’ cash would continue to be tight and domestic upstream projects may see further delays or even cancellations. We do note that the capex for these priority projects would be staggered over the years and also involve equity partners. As at 9M15, Petronas was in a net cash position of MYR62.3bn.

Source: RHB Research - 12 Nov 2015