Petronas recorded a 4Q21 core profit of RM11.6bn (-4% QoQ, YoY: -RM1.5bn), bringing FY21 core profit to RM39.6bn (+404% YoY). We deem FY21 capex spending of RM30.5bn (-8% YoY) to be below our expectations at 87% of our full-year capex forecast of RM35bn. We raise our Brent crude oil price per barrel forecast to USD85-90 (from USD70-75 previously) for 2022. We project Petronas capex spending to increase to the RM40-45bn level annually over the next 5 years (2022-2027) to take advantage of the current soaring oil prices (above USD100/bbl currently) – which would in turn benefit the entire O&G value chain in Malaysia. Maintain OVERWEIGHT on the Oil & Gas sector with DNeX (BUY; TP: RM1.64), Bumi Armada (BUY; TP: RM0.84) and Dialog (BUY; TP: RM3.32) as our top picks.

QoQ. Petronas’ 4Q21 revenue increased by 24% mainly due to: (i) higher average realised prices; and (ii) higher sales volumes for all of its major products. We believe this stems from higher average oil prices throughout the quarter of USD80 as compared to USD73 in 3Q21. However, core profit was down -5% QoQ due to an effective tax rate of 33% in 4Q21 (vs. 14% in 3Q21).

YoY. Petronas recorded 4Q21 core profit of RM11.6bn from losses of -RM1.5bn in 4Q20, also due to more favourable average realised prices for the group’s major products, which we believe stems from higher average oil prices throughout the quarter of USD80 as compared to USD45 in 4Q20.

YTD. Core profit spiked 5-folds YoY in FY21 due to the same reasons mentioned above. Recall that crude oil prices took a major slump in 2020 due to the crash in demand that followed from the outbreak of Covid-19, along with a price war between oil giants Saudi Arabia and Russia in early M arch. Oil prices averaged at USD71 in FY21 vs. USD43 in FY20.

Dividend. Dividends totalling RM25bn was paid in FY21 – representing about 60% of reported PATAMI. This is still far below the RM54bn and RM34bn dividends paid in 2019 and 2020 respectively. The group’s net cash position continued to improve, growing by 7.9% to RM56.7bn as at end-December 2021 from RM52.6bn as at end September 2021.

Capex. Petronas’ 4Q21 capex stood at RM10.1bn (+33% QoQ, -5% YoY) in-line with its better quarterly operating cash flow of RM24.1bn (+11% QoQ, +196% YoY). We deem FY21 capex of RM30.5bn to be below our expectations at 87% of our full-year capex forecast of RM35bn. We project Petronas capex spending to increase to the RM40-45bn level annually over the next 5 years (2022-2027), with about 20% (RM8.0-9.0bn) of its annual capex allocated to new energy initiatives. Petronas also aims to increase domestic spending to 55% of capex (RM22-25bn) and the remaining would be for international programmes. We think that indicated capex levels should be sufficient to help the sector recover in 2022, albeit still lower than its pre-pandemic 2018-2019 levels.

Oil price forecast. We raise our Brent crude oil price per barrel forecast to USD85- 90 (from USD70-75 previously) for 2022. Brent oil price has surged past the USD100/bbl, an increase of c.50% since December 2021 – when the Russia-Ukraine conflict started to build up. According to EIA, Russia is the third largest oil producer in the world at 10.5m bpd or 11.2% of global output in 2020. As such, if sanctions were to eventually encompass Russian oil, this could send prices ascending further due to the anticipated supply crunch in the global oil markets.

Outlook. We expect Petronas to elevate its capex spending in FY22 to take advantage of the current soaring oil prices (above USD100/bbl currently). This would in turn benefit the entire O&G value chain in Malaysia. We should also see capex spending in 2022 to be better than 2021, albeit still lower than its pre -pandemic 2018- 2019 levels. We forecast a capex spending of RM40-45bn in 2022.

Maintain OVERWEIGHT on the O&G sector. Our top picks for the sector are: (i) Dagang NeXchange (BUY; TP: RM1.64) as it stands to be a direct beneficiary of the soaring oil prices from their Anasuria oil-producing assets and strong ASP growth from Silterra; (ii) Bumi Armada (BUY; TP: RM0.84) given its foothold in the FPSO business which provides steady recurring income, coupled with speedy enhancement in its debt profile; and (iii) Dialog (BUY; TP: RM3.32) for its recurring income type of business model and we deem it as one of the only listed secular growth stock in the local oil and gas space.

Source: Hong Leong Investment Bank Research - 2 Mar 2022