• Maintain OVERWEIGHT; Top Picks: Yinson and Malaysia Marine & Heavy Engineering. We are lukewarm on Petronas’ annual domestic spending guidance for 2023-2027 – since the yearly amount of MYR22.6bn is 9-11% lower than what was spent in 2018-2019 (pre-pandemic). While we remain upbeat on the overall level of oil & gas activities, we turn more selective on stock picks. We prefer companies with resilient earnings profiles, backed by solid orderbooks. Our 2023-2024 crude oil price estimates are still at USD85-80/bbl.

• Petronas’ 1Q23 report card. The national oil company’s core PAT slipped by 2% YoY to MYR23.2bn on weaker EBITDA (-4% YoY, from lower margins as a result of higher costs) even though revenue increased by 16% YoY, led by higher sales volume and a stronger USD. It paid a MYR4bn dividend in 1Q23, and the full-year amount was approved at MYR35bn – lower than its previous, revised guidance of MYR40bn in March. We still think that Petronas is capable of paying dividends of up to MYR40bn this year, without jeopardising its balance sheet materially. Its net cash position still strengthened to MYR114bn (+5% QoQ, +26% YoY). 

• Domestic capex guidance of MYR113bn over 2023-2027. Petronas’ capex spending picked up by 42% YoY in 1Q23 to MYR10.5bn, of which the upstream segment was the largest contributor (41%), followed by gas (22%) and Gentari (16%). The higher capex was largely due to the acquisition of WIRSOL Energy, a renewable energy (RE) solutions provider in Australia. Overall capex spent in this quarter represented 17.5% of the average annual capex guidance of MYR60bn over the next five years. We expect capex spending to ramp up in the next few quarters, especially in 2H23. Petronas has guided that it will spend c.MYR113bn or an average MYR22.6bn pa between 2023 and 2027, which is a 12% increase from MYR101bn over the previous five years (ie MYR20.2bn pa). Simply put, we are not overly excited over such numbers – since its average annual domestic spending guidance of MYR22.6bn is 9-11% lower than what was spent in 2018-2019 (prior to the pandemic), despite the amount being higher than its annual spending of MYR15.0-18.6bn in 2020-2022.

• Higher allocation to new business. Petronas’ RE capacity in operations and under development increased by 0.2GW QoQ to 1.8GW – which is on track for it to meet the 3GW target by 2024. It is now targeting a 30% revenue contribution from non-traditional business by the end of this decade, while continuing investing in its core portfolio. This is because hydrocarbon usage is expected to remain relevant in the longer run. Its commitment to grow non-traditional sources of income was evidenced by a higher allocation of 25% (vs 20% previously) of the total, for its 5-year spending plan.

• Downside risks to our sector weighting: Weaker oil prices and demand, as well as a decrease in spending by clients.

Petronas’ 1Q23 Results Review

Stronger sales volume and USD lifted revenue. 1Q23 revenue improved by 16% YoY to MYR90bn on higher sales volume and a stronger USD (+5%), masking weaker ASPs. Brent and Japanese Crude Cocktail (JCC) prices dropped 21% and 12% YoY to USD81.12 and USD87.05 per bbl. Liquefied natural gas (LNG) and petrochemical product sales volumes increased by 6% and 26% YoY to 8.9m and 2.4m tonnes, while its crude oil sales volume dropped by 10% to 27.4m bbls. Petroleum product sales also surged 32% to 77.2m bbls in 1Q23. Despite so, core PAT fell marginally by 2% YoY to MYR23.2bn on weaker EBITDA (-4%, on lower margins as a result of higher costs)

Source: RHB Securities Research - 8 Jun 2023