RHB Investment Research Reports

Integrated Oil & Gas - the Upstream Wave Continues; Still OVERWEIGHT

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Publish date: Tue, 04 Jun 2024, 12:29 PM
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  • OVERWEIGHT; Top Picks: Dialog, Yinson and Dayang Enterprise. From perusing Petronas’ 1Q24 report card, we expect its capex spending to be maintained at MYR50-60bn in 2024 (2023: MYR52.8bn), with the upstream segment being the key focus in order to achieve its production target. As such, we remain positive on the upstream services players, premised on sustained activities, elevated service rates and news flow from contract renewals. Our 2024-2025 crude oil price estimates remain at USD88-85/bbl.
  • Petronas’ 1Q24 report card. The national oil company’s PAT fell by 17% YoY to MYR21bn in tandem with a lower EBITDA (-6%), no thanks to higher opex and weaker JV & associate contributions. It paid a MYR3bn dividend to the Government in 1Q24, putting it on track to its full-year payment of MYR32bn. Petronas’ net cash position improved slightly QoQ (+2%) to MYR110bn as of 1Q24, as its strong operating cash flow (-39% QoQ, -8% YoY) was offset by capex and dividend payments.
  • Capex spending sustained at MYR10.7bn (+2% YoY) in 1Q24. The upstream segment was the largest contributor (64%), followed by the gas (17%) with Gentari and downstream businesses having an equal split of 7%. Domestic capex accounted for 51% of total capex and increased by 20% YoY in 1Q24 to MYR5.5bn, mainly on a near-shore floating LNG project in Sabah, the Kasawari gas field development and CO2 sequestration facilities in Sarawak. This is in line with its domestic average capex spending guidance of c.MYR22.6bn pa (5-year capex of MYR113bn) over 2023-2027. Petronas recorded a production of 2587kboepd (+4% YoY, +1% QoQ) with Malaysia production exceeding 2000kboepd. We saw an emphasis on the upstream segment, and believe this trend is likely to continue – since Petronas aims to achieve a total production of 2.7mboepd by this year (2mboepd from the domestic portfolio) and sustain these numbers until 2030. On a side note, we are likely to see more emphasis on carbon capture and storage (CCS) projects in the longer run, as Malaysia is aiming to emerge as a regional hub in this field.
  • Our key themes remain unchanged. Overall group costs also rose 3% YoY to MYR70n, predominantly led by higher domestic costs (+10% YoY) to support domestic operations. Despite a typical seasonally weak quarter, we saw five companies under our coverage booking results that surprised on the upside – Dialog, Bumi Armada, Dayang Enterprise, Coastal Contracts and MISC. Overall, we remain positive on the upstream service providers in 2024, with activities ramping up in 2Q-3Q. Drilling activities should remain solid, similar to maintenance activities. Meanwhile, the outlook for the OSV market is rosy, as there are still potential improvements in daily charter rates due to tight vessel supply. We expect domestic long-term maintenance and OSV charter contracts to be awarded in 2H24, providing further earnings visibility in the medium term. Downside risks to our sector weighting: Weaker oil prices and demand, as well as a decrease in spending by clients.

Source: RHB Securities Research - 4 Jun 2024

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