Neutral on O&G sector despite Petronas` growth in 1Q19

04  Jun 2019

Source: Borneo Post (Kuching)



Neutral on O&G sector despite Petronas' growth in 1Q19

KUCHING: Although signs are looking good for national oil and gas firm Petroliam Nasional Bhd (Petronas) as it posts growth of 16 per cent in its core profits in the first quarter of 2019 (1Q19), analysts still stayed neutral on the sector's outlook.

This comes as Petronas last Friday reported 1Q19 core profits after tax, amortisation and minority interest (PATAMI) of RM12 billion after stripping-off net impairment write-backs.

The growth was helped by higher sales volume for petroleum products and liquefied natural gas (LNG), on top of benefiting from the weakening ringgit, but offset by lower average realised prices.

"Sequentially, the quarter's core PATAMI grew 37 per cent quarter on quarter (q-o-q), mainly due to lower production costs, on top of lower finance costs and fixed overhead savings," Kenanga Investment Bank Bhd (Kenanga Research) said in a note yesterday.

"This is despite poorer revenue, dragged by lower sales volumes and average realised prices, on top of a stronger ringgit q-o-q."

During the quarter, the group paid RM12 billion of dividends in relation to the RM30 billion special dividend declared in end-FYi8, with the remaining RM18 billion to be paid throughout the year, although seemingly no dividends were declared this quarter.

Despite so, Petronas' cashpile remains strong at RM172 billion - almost unchanged from endFY18. The group had also incurred capital expenditure (capex) of RM8.3 billion during the quarter, mainly attributed to upstream projects.

"With the group having already committed to higher capex of more than RM50 billion for 2019, we believe higher spending would come in the coming quarters, with focus on upstream," Kenanga Research added.

"Nonetheless, with Petronas' improved earnings trajectory, we believe the group should be able to deliver on its committed higher capex even despite higher dividend payments for the year."

Kenanga Research further said value chains will continue to benefit from higher Petronas capex.

"We believe the higher capex, especially in the upstream space, could be sanctioned for fields under development such as Kelidang and Limbayong, as well as production enhancement for existing brownfields," it opined.

"As such, we see potential beneficiaries of a higher Petronas capex spend to include fabrication players, drilling players, production enhancement players, as well as floating production providers.

"Nonetheless, cost optimisation would still remain as a key factor, and hence, we should continue to expect competitively lower margins for upcoming job awards."

In another note, Amlnvestment Bank Bhd (Amlnvestment Bank) saw that contract awards declined 20 per cent yo-y and 27 per cent q-o-q to RM3 billion during the period, largely due to Sapura Energy securing lumpy central processing platform jobs for the Pegaga project off Sarawak in 1Q18 together with the developments for the Hokchi field in the Gulf of Mexico and KW-DWN 98/2 block off India in 4Q18.

Nevertheless, offshore projects in Brazil, Mexico, the Middle East and West Africa may be still poised to gain traction with Sapura and MMHE being selected for Saudi Aramco's Long Term Agreement programme, which allows them to bid for the kingdom's massive offshore projects that could reach US$150 billion over the next 10 years.

"We are neutral on the sector given the volatility in oil price direction over the next 6 months, lingering balance sheet risks of Malaysian operators such as Bumi Armada, unresolved US trade dispute, deteriorating global economic growth outlook and easing of US pipeline constraints.

"Our top picks are still companies with stable and recurring earnings such as Serba Dinamik and Dialog Group."