Dragged by Weaker Realised Prices

Petronas’ FY23 core net profit dropped 18.6% YoY to RM81.5bn, mainly dragged by Upstream, Gas and Downstream segments (Figure 1). The upstream segment’s PAT declined 23.5% YoY in FY23, underpinned by: (i) lower average Brent prices at USD82.6/bbl (FY22: USD101.3/bbl), (ii) higher amortisation from additional capitalisation of assets and (iii) higher net impairment losses/write-off on assets. The gas segment’s PAT in FY23 slipped 29.8% YoY as the average Japan Crude Cocktail reported a YoY decrease of 15.5% to USD86.4/bbl (FY22: USD102.2/bbl). The downstream segment registered a 5.5% YoY decrease in PAT driven by poorer refining and petrochemical spread. In contrast, the Corporate and Others (C&O) segment’s PAT grew 17.0% YoY due to higher fund investment income. The group paid dividends of RM40bn in 2023 (2022: RM50bn) (Figure 4).

Capex on the Rise

Petronas’ capex in 4QFY23 was RM18.4bn (+42.4% QoQ, -18.8% YoY) (Figure 2). This brings FY23 capex to RM52.8bn (+5.3% YoY) (Figure 3). FY23 capex was largely focused on the Upstream segment (51%), with the remaining distributed between the Gas segment (18%), Gentari (12%), Downstream segment (11%) and C&O segment (8%). Half of the capex was allocated for domestic. In fact, domestic capex was up 40.9% YoY to RM26.2bn in FY23, the highest capex since FY17. Petronas has allocated between RM50bn-60bn in capex for FY24. Out of this amount, the group plans to earmark 20% for decarbonisation initiatives and expansion into cleaner energy solutions.

Oil Supported by Voluntary Supply Cut

We maintain our average 2024 Brent crude oil price assumption of USD85/bbl (Current: USD85/bbl, EIA forecast: USD82/bbl). Additionally, we introduce our 2025 price assumption of USD86/bbl (EIA forecast: USD87/bbl). Our assumptions are underpinned by expectations of continuation in voluntary supply cuts by OPEC+ that would form a floor to the oil prices and demand to pick up in China following rate cuts from the world’s second-largest economy. Recap that Russia announced an additional 471k barrels per day (bpd) of voluntary cut in 2QCY24. This, on top of the 2.2mn bpd supply cut extension into 2QCY24 announced by OPEC+, brings the total OPEC+ production cut to 2.7mn bpd. In its March 2024 Oil Market Report, IEA forecast that global oil supply will increase by 800k bpd to 102.9mn bpd. Meanwhile, global demand is forecast to rise by 1.3mn bpd. Hence, IEA’s balance for the year has shifted from a surplus to a slight deficit.

Geopolitical Tension Boost to Prices

According to IEA, the rerouting of ships away from the Red Sea amid attacks by Yemen’s Houthi is expected to increase bunkering demand due to longer shipping distances and faster vessel speeds. The disruptions led to 1.9bn bbls of oil at sea at the end of February 2024, nearly the highest since the Covid pandemic. Meanwhile, Ukraine has struck several major Russian oil refineries recently. As Russia’s refining capacity is damaged, this can result in Russia to start importing gasoline, pushing up prices. The increase in gasoline prices has boosted the gasoline-spread and 321-crack spread to their highest since August and September 2023, respectively. This incentivises crude oil processing and raises crude oil demand in the near term.

Overweight on Resilient Oil Price

We maintain Overweight on the sector on the back of resilient oil prices. Within our universe of coverage, we have Buy recommendations on upstream service providers such as VELESTO (TP: RM0.33) and PANTECH (TP: RM1.18). VELESTO’s earnings are expected to grow as DCR for jackup drilling rigs remains high due to the tight market supply. Meanwhile, PANTECH would benefit from higher Petronas and the oil and gas industry’s capex. Other direct beneficiaries of resilient oil prices are oil field owners such as HIBISCS (Not Rated) and DIALOG (Not Rated). Notably, DIALOG benefits from raising geopolitical tension due to increased demand for storage at its tank terminals. We also like MISC (TP: RM8.30) due to expectations of higher LNG charter rate in tandem with higher demand for natural gas as a transitional fuel. We believe MISC is a top contender for future FPSO projects, considering the clean audit results and exceptional safety profile of Mero 3. As for petrochemical players (PCHEM and LCTITAN), we believe that product prices will remain weak at least until the end of 2024 on the back of the supply glut. Nonetheless, demand should gradually improve as global central banks are poised to cut interest rates by end-2024.

Source: TA Research - 18 Mar 2024