The research house has retained ‘OVERWEIGHT on this sector;
While top Picks of this sector are: Petronas Chemicals (PCHEM), and Bumi Armada (BAB). Amidst the strong set of results in 1Q22, Petronas has indicated activities will pick up in the coming quarters, with capex potentially returning to pre-pandemic levels (>MYR40bn). It is believed that upstream service providers (drillers, maintenance related) should benefit from a ramp-up in activities and increased domestic capex allocations, coupled with better service rates ahead.
Petronas’ 1Q22 report card. Petronas’ PAT jumped 1.5x YoY to MYR23.7bn excluding net impairment losses on assets, in tandem with itshigher EBITDA (+73% YoY). After the MYR3bn dividend payment, its net cash continued to strengthen (+35% QoQ) to MYR91bn, underpinned by stronger operating cash flow (+16% QoQ). At this juncture, there is no special dividend requested by the Government. That said, Petronas, in the analysts’ opinion, is capable of paying another MYR10-20bn in special dividends in 2022-2023F – to reduce the Government’s financial burden – without causing a significant deterioration to its net cash position.
Capex returning to pre-pandemic levels? Capex spending picked up 12% YoY in 1Q22 to MYR7.4bn, of which the upstream segment was the largest contributor (58%), followed by downstream (17%) and gas (14%). Overall capex spent in this quarter represented 15-19% of the estimated total capex of MYR40-50bn in 2022, and is also rather reflective of 2019 levels. Capex spending is expected to ramp up in the next few quarters, especially in 2H22. Domestic capex has increased by 30% YoY in order to strengthen the oil & gas services and equipment (OGSE) system, and activities are likely to escalate in the coming quarters. Meanwhile, Petronas’ renewable energy capacity in operations and under development surpassed 1GW – putting it on track to the 3GW target by 2024.
Higher group costs. The national oil company’s overall group costs have increased 26% YoY to MYR56.5bn, with a revenue growth of 50% YoY in 1Q22. Such a hike is well higher than the <1% increase in 2021, when its full-year revenue grew by 39% YoY. This could also suggest that Petronas has increased its service rates, apart from merely catering for higher material and equipment costs amidst elevated commodity prices.
Oil prices remain elevated. OPEC+ will have its 29th ministerial meeting on 2 Jun. OPEC+ is likely to maintain its production ramp-up schedule. While FY2023F crude oil prices are expected to be at USD104.00-85.00/bbl but there might be upside to the analysts’ forecasts, as the EU ban on Russian oil is not within their base case.
Downside risks: Weaker oil prices and demand, as well as lower spending by clients.
