PublicInvest Research

OIL & GAS - Accelerated Capex Despite Weaker Earnings

PublicInvest
Publish date: Mon, 18 Mar 2024, 11:08 AM
PublicInvest
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An official blog in I3investor to publish research reports provided by PublicInvest Research team.

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PETRONAS recorded 4QFY23 core net profit of RM17.6bn, weaker by 20.2% QoQ and 19.0% YoY. This brings its full year FY23 core profit to RM80.4bn, dipping by 14.5% YoY from RM94.1bn in FY22. The weaker earnings are due to moderation in Brent crude oil prices at average of USD82.6/bbl in the year 2023, lower by 18.4% (USD101.3/bbl) in 2022. This has impacted all segmental earnings with the weakest from gas segment, dropping by 29.8% YoY, followed by upstream segment at -23.1% YoY. Despite the subdued performance, PETRONAS’ capital expenditure (capex) increased to RM52.8bn, higher by 5.3% on a YoY basis. The increase was led by domestic capex of RM26.2, higher by 41% YoY and exceeding annualised target of RM22.6bn (RM113bn for FY23-FY27). We expect PETRONAS’ annual domestic capex to remain intact on the back of stable Brent oil prices, supported by OPEC+ production cut extension and demand outlook revision. Hence, the prospect for our local oil and gas service equipment (OGSE) and offshore support vessel (OSV) remains positive for FY24F but potentially seasonally weaker in 1QFY24 due to the monsoon season. Although sentiment has improved slightly, we are still not overly bullish on Brent crude oil prices to be traded sustainably above USD90/bbl in 1H2024. We maintain our Neutral call on the sector.

  • Highest overall and domestic capex since 2018. PETRONAS’ capex increased to RM52.8bn, the highest since 2018, from RM50.1bn in FY22. It allocated the most capex to the upstream segment amounting to RM26.9bn. FY23 also recorded the highest domestic capex in 6 years at RM26.2bn. The capex was mainly channelled to Nearshore Floating LNG Project in Sabah and Kasawari Field Development and CO2 Sequestration Facilities in Sarawak.
  • Annual domestic capex remains intact. In FY23, PETRONAS generated operating cashflow of RM114.2bn at average Brent crude oil price of USD82.60/bbl and has ample buffer after the payment for capex and dividend. Moving into FY24, we expect PETRONAS domestic capex to remain intact with an annualized target of RM22.6bn on the back of stable oil prices as Brent has traded at an average of USD81/bbl on a YTD basis. Sentiment also lifted with the recent OPEC+ production cut extension until June 2024 and higher revision of oil demand outlook to grow by 1.3MM bbl/d from 1.2MM bbl/d by IEA. Nevertheless, we are not overly bullish on Brent being sustainable at above USD90/bbl in the short term due to ample spare capacity from OPEC+ and elevated production levels in the US.
  • We maintain our top pick, Uzma and Dayang, as main beneficiaries of the accelerated domestic capex by PETRONAS. PETRONAS Activity Outlook (PAO) 2024 has indicated elevated activity level for the next 3 years that requires a significant number of assets such as hydraulic workover unit (HWUs) and OSVs. Thus, the unit or daily charter rates for such assets will continue to creep up due to scarcity of these assets among the local players. Uzma and Dayang are wellpositioned to benefit from the tight market as owners of these key assets.

Source: PublicInvest Research - 18 Mar 2024

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