Oil & Gas - Petronas Dragged by Lower Product Prices

Date: 
2023-11-30
Firm: 
KENANGA
Stock: 
Price Target: 
3.10
Price Call: 
BUY
Last Price: 
2.15
Upside/Downside: 
+0.95 (44.19%)
Firm: 
KENANGA
Stock: 
Price Target: 
3.79
Price Call: 
BUY
Last Price: 
2.53
Upside/Downside: 
+1.26 (49.80%)

Petronas' 9MFY23 revenue declined, impacted by weaker product prices in both its upstream and gas divisions. However, the profit decline YoY was mitigated by cost reductions. On a positive note, the group's spending in 9MFY23 reached RM34b, representing a significant YoY increase, with the bulk allocated to upstream activities. The group maintains a sizable war chest on its balance sheet, sufficient to cover its capex and dividend for CY23. Looking ahead to CY24, we anticipate a capex ramp up to reach the annual target of RM60b, considering the likely lower dividend commitment. Higher capex will benefit upstream service providers due to their revenue correlation with capex trends by oil producers. Cautiousness prevails in the downstream segment due to uncertainties in global demand and oversupply concerns. Our top picks remain YINSON (OP; TP: RM3.79) and DIALOG (OP; TP: RM3.10).

YoY, Petronas' 9MFY23 revenue experienced an 11% YoY decline, driven by weaker realized Brent prices and Japanese Customs Cleared Crude Oil prices (JCC) in its upstream and gas divisions. The realized Brent price fell by 22% to USD82/bbl (from USD106/bbl), and the JCC price dropped 17% YoY to USD85/bbl (from USD103/bbl), impacting the gas division's topline. Profit declined at a slower rate of 5.6% YoY, attributed to reduced administration and distribution costs resulting from cost-saving measures. On a QoQ basis, the 3QFY23 topline increased by 6% due to improvements in realized Brent prices. Net profit rose at a faster rate by 36% QoQ, mainly due to lower operating expenses.

Capex spending surged. The group spent RM34b in 9MFY23, 25% higher YoY. From that, 72% of the capex was allocated to both upstream and gas divisions, while downstream and new energy projects accounted for the rest. Out of the total capex, domestic spending was at RM16b, 37% higher YoY, predominantly driven by the Nearshore Floating LNG project in Sabah, Kasawari Gas Field development, and CO2 sequestration facilities in Sarawak. This indicates that Petronas is still upstream-heavy on its capex and would likely maintain this spending pattern in the coming years. Nevertheless, the total capex spent of RM34b is still far from its target of an average of RM60b per annum (spanning CY23-27).

Meanwhile, the group’s net cash remains sizable at RM97m. To recap, Petronas announced that it will pay a total of RM40b dividends to the government this year (2022: RM50b) and we believe that its cash flow would be more than sufficient to cover both dividends and capex (which is likely to be under RM60b this year). Moving into CY24, we expect dividends to be slightly lower than RM40b and this would provide extra room for Petronas to boost its capex closer to RM60b.

Sustained strong upstream capex momentum. As long as Brent crude prices remain above USD75/bbl, the group is poised to increase its capex to around RM60b in CY24. From 2020 to 2022, the group recorded significantly lower capex, averaging RM38b. We anticipate Petronas will boost its upstream capex in FY24 to counteract the natural decline in oil and gas production due to reduced spending in previous years. The increase in Petronas' capital expenditure would benefit upstream service providers, potentially resulting in heightened demand and enhanced margins for their services. The group would not increase its capex allocation for downstream in CY24 due to the uncertain demand outlook.

We maintain our NEUTRAL view of the sector. In essence, we continue to be positive on upstream service providers due to the expected uptick in upstream capex in 2024. Nevertheless, we are less excited about the downstream sector outlook amid uncertainties in global demand coupled with an anticipated increase in global capacities.

Our top picks remain YINSON (OP; TP: RM3.79) due to a strong FPSO order book pipeline and early exposure in green technology businesses and DIALOG (OP; TP: RM3.10) as its legacy EPCC contracts (with unfavourable pricing) essentially concluded and its tank terminal business remains resilient.

Source: Kenanga Research - 30 Nov 2023

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