RHB maintains ‘Overweight’ call on O&G sector

Many projects were affected by the prolonged movement restrictions and supply disruptions 


RHB Research has maintained their ‘Overweight’ on the oil and gas (O&G) sector as it sets to benefit from higher capital expenditure (capex) allocation and heightened geopolitical tensions that could potentially hit US$110-US$120 (RM502.80)/billion barrels of petroleum liquids (bbl) if Russia’s invasion of Ukraine continues to escalate. 

According to its analyst Sean Lim, Petroliam Nasional Bhd (Petronas) recorded a profit after tax of RM48.6 billion from a RM221 billion loss in the financial year 2020 (FY20) supported by better product prices. 

Capex spending rose by 34% QoQ in 4Q21 (-10% YoY) to RM10.1 billion, lifting the FY21 figure to RM30.5 billion (-9% YoY). 

The QoQ ramp-up in capex was largely led by upstream (+21%), downstream (+101%) as well, as the gas and new energy (GNE) division (+98%). 

Many projects were affected by the prolonged movement restrictions and supply disruptions. 

“Activities have been picking up since early 2022. As such, Petronas could boost its capex spending to RM40 billion-RM50 billion this year, with an equal split between domestic and international operations,” said Lim. 

The upstream segment was the largest contributor at 48%, followed by GNE, at 23% of total capex in 2021. 

“Petronas also aims to establish a new independent entity that will focus on clean energy solutions by mid-2022. About 20% of total capex has been allocated for “Step Out” projects that include specialty chemicals, renewable energy and hydrogen. It also disclosed its outstanding capex commitment,” he added. 

Total capex approved as of end financial year 2021 (FY21) was at RM100.5 billion (-8% YoY) and its share of capex of joint ventures was at RM141.3 billion (-28% YoY). 

He added that if Petronas is spending RM20 billion capex annually for upstream activities in 2022, this would point to a strong increase of 37%, from FY20’s RM14.6 billion. 

“We believe the domestic upstream space will be the beneficiary, if 60% of it is allocated to the domestic arm. Meanwhile, it was reported that Petronas will not be making any rushed decisions about its ongoing collaboration with Russian oil firm Gazprom in Iraq’s Badra oilfield,” he added. 

The national O&G firm returned to the black with a profit after tax (PAT) of RM48.6 billion, from a RM21 billion loss in FY20, due to better product prices. 

“We expect Petronas’ capex to pick up to RM40 billion-RM50 billion, from RM30.5 billion in FY21. Service providers should gradually benefit from a ramp-up in activities and increased domestic capex allocations,” he stated in the report. 

Excluding net impairment losses on assets, PAT still surged by 3.6x — in tandem with a higher Ebitda (+82%), with better product prices. 

“To meet its RM25 billion dividend target, the remaining RM9 billion dividend was paid in 4Q21 (FY21: RM25 billion) but Petronas’ net cash continued to strengthen (+5% QoQ) to RM67 billion, underpinned by stronger operating cashflow (+11% QoQ),” he said in the report. 

Six companies under RHB coverage released their 4Q21 results last month. 

“It was, again, a mixed set of results — with one above, two below, and three in line with expectations. The disappointments were, again, MISC Bhd (MISC MK, ‘Buy’, TP: RM7.79) and Malaysia Marine & Heavy Engineering Holdings Bhd (MMHE MK, ‘Neutral’, TP: RM0.42). MMHE’s numbers have missed expectations for four consecutive quarters, on additional cost provisions and weaker project billings. MISC’s performance also continued to disappoint, dragged by its subsidiary, MMHE,” said Lim. 

Petronas Chemicals Group Bhd (PetChem) was the only positive surprise. 

“PetChem delivered another set of record earnings, thanks to stronger than expected margins amid better petrochemical prices. The counter remains our sector top pick, due to its undemanding valuation and potential earnings upside amidst rising oil prices,” he added.