• Maintain O/W; Top Picks: Yinson and Dayang Enterprise. After reading through Petronas’ 1H23 report card, we believe that the higher dividend payment of MYR40bn for 2023 is reasonable, and still expect the company to ramp up its capex spending in 2H23. We remain upbeat on the overall level of oil & gas (O&G) activities, and continue to favour upstream services players. Our 2023-2024 crude oil price estimates remain at USD81-80/bbl.

• Petronas’ 1H23 report card. The national oil company’s core PAT slipped 22% YoY to MYR22bn on weaker EBITDA (-24% YoY due to lower average realised prices) in 2Q23. It paid a MYR16bn dividend in 1H23, and the full year amount has risen to MYR40bn from its previous revised guidance of MYR35bn in June. Petronas highlighted that the dividend distribution has taken into account its capacity, based on long-term projections. We concur that such an amount is still reasonable, and will not jeopardise its balance sheet. Its net cash position strengthened to MYR118bn (+4% QoQ, +14% YoY).

• Expecting a capex ramp-up in 2H23. Capex spending improved slightly in 2Q23 (+4% QoQ) to MYR10.9bn, lifting the 1H23 figure to MYR21.4bn (+13% YoY). The upstream segment was the largest contributor (46%), followed by the gas and Gentari businesses, at 23% and 14%. Overall capex spent during the quarter accounted for 36% 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. Domestic capex accounted for 49% of total capex and increased 48% YoY in 1H23 to MYR10.5bn. This is also broadly in line with Petronas’ domestic capex spending guidance of c.MYR113bn or an average of MYR22.6bn pa between 2023 and 2027. Its renewable energy (RE) capacity in operations and under development increased by 0.2GW QoQ to 2GW, putting it on track to meet the target of 3GW by 2024.

• Petronas’ stance. President and group CEO Tengku Tan Sri Muhammad Taufik said Brent crude oil will likely hover within the range of USD70-80/bbl in the next 12 months amid the challenging and uncertain environment. It was also reported in the media that Petronas will vigorously defend Malaysia’s rights to develop assets and energy reserves for its own energy security. This was in response to China’s newly released 2023 Standard Map, which appears to encroach into Malaysia’s O&G reserves by incorporating a significant portion of the territorial waters within the country’s exclusive economic zone near Sabah and Sarawak. Meanwhile, Petronas stated that it remains “committed to Sarawak” and will continue to work with the state government to develop its hydrocarbon assets.

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

Source: RHB Securities Research - 1 Sept 2023