This article first appeared in The Edge Financial Daily on March 6, 2018 - March 12, 2018
Oil and gas sector
Maintain neutral: Year-on-year (y-o-y): Petronas group core profit after tax (PAT) grew 20.8% to RM18.2 billion mainly due to stronger upstream division performance driven by higher realised oil prices and higher sales volume mainly from liquified natural gas (LNG) and petroleum products.
Quarter-on-quarter (q-o-q): Core net profit surged 86.5% due to higher average realised product prices recorded for major products and higher sales volume for LNG, crude oil and condensate and natural gas.
FY17: PAT surged 24.1% due to higher realised oil prices resulting in strong upstream division performance despite lower production volume (caused by lower Iraq production and slower Canadian activities), and stronger downstream PAT underpinned by wider petrochemical product spreads.
The group’s capital expenditure (capex) declined 11.6% despite 40.5% surge in operating cash flow. This has given the group flexibility of higher dividend payment to the government. For FY17, the group has committed to paying a dividend of RM19 billion (RM16 billion for FY16) to government, representing 18.8% y-o-y growth.
Despite the encouraging operating cash flow due to improved oil prices, we believe that it would not translate into significant increase in contract award for the upstream services players. The key reasons for our argument are: Petronas would be more likely to increase dividends to government, and investment in refinery and petrochemical integrated development project is still ongoing until 2019.
Going forward we understand that Petronas Group will continue to focus more on cost per barrel of oil rather than absolute growth in oil reserves. As a result, we do not expect upstream capex to increase significantly. Nevertheless, we opine that upstream activities are recovering albeit at a slower rate due to recovery of oil prices.
Preferred picks: Dayang (buy; TP: 91 sen) and UMW Oil & Gas (buy; TP: 44 sen). For Dayang, The completion of dividend in specie would remove the overhang delay of relisting of Perdana shares. This would better reflect the value of the group’s stake in Perdana. Earnings recovery is also expected in 2018. For UMW Oil & Gas, following its latest outstanding quarterly result, we believe that its earnings outlook has improved significantly. — Hong Leong Investment Research, March 5
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