Q&G: Higher priority for downstream segment

Malaysia’s oil and gas sector saw a solid 1Q17 performance from Petroliam Nasional Bhd (Petronas), with the group recording a drastic increase in earnings compared to the corresponding quarter last year.

In an interim financial report filing on Bursa Malaysia, Petronas announced that the group recorded profit after tax ( PAT) of RM10.3 billion for the current quarter, an increase of more than 100 per cent from 1Q16.

Looking at capital expenditure (capex), Petronas spent RM11.9 billion in 1Q17 and the research arm of Kenanga Investment Bank Bhd ( Kenanga Research) reckoned the bulk of it was attributed to committed investment in Pengerang Integrated Complex project, which was at 63 per cent completion as of March 2017.

“Moving forward, Petronas will continue to embark on cost optimisation measures to lower its cost base,” Kenanga Research noted.

“Petronas had spent an average capex of RM36 billion per annum in the past five years with circa 60 per cent allocated to upstream segment.”

On the group’s capex, the research arm believed that higher priority will be given to downstream segment, particularly on the refinery and petrochemical integrated development ( RAPID) project in the near term.

In FY17, the research arm believed Petronas’ operating cash flow ( OCF) at most is sufficient to cover the group’s committed capex of RM60 billion but might not be sufficient to fully fund its dividend commitment of RM13 billion.

“However, this is not alarming, in our view, given that Petronas’ balance sheet remains healthy with net cash position of RM59.2 billion as of 1Q17, improving from RM53.9 billion in 4Q16,” the research arm opined.

Deeper production costs expected

On the decision of the Organization of the Petroleum Exporting Countries ( OPEC) and non- OPEC members agreeing to extend production cut for nine months, Kenanga Research found this development slightly disappointing as some parties were expecting deeper production cuts.

With this outcome, the research arm expected oil prices to trade at a lower range of US$ 48 to US$ 52 per barrel ( bbl) in the near term versus US$ 53 to US$ 57 per bbl during the initial cut in December 2016. The research arm has however noted that better oil prices could be

seen in the second half of 2017 ( 2H17) banking on stronger demand and potential further price propping actions led by Saudi ahead of valuations for Saudi Aramco’s initial public offering ( IPO).

“While the Aramco deal would be indirectly beneficial for local upstream industry, it may not be realisable in 2017 as the details of the deal have yet to be firmed up,” the research arm of Hong Leong Investment Bank Bhd ( HLIB Research) opined in an industry insight.

“It is now more than likely that Petronas would have to maintain its capex level in RAPID in 2017 (i.e. lower cash f low available for upstream capex) before investments from Aramco kick in, possibly in 2018 the earliest.”

Further cut dependent on OPEC producers

As for recent news reporting that OPEC could revisit the proposal for a further cut of up to 300,000 bbl per day from the existing 1.2 million bbl per day cut, Kenanga Research believed that such proposal is very much dependent on the reaction of other OPEC producers as well as non- OPEC countries.

Al l in, the research arm retained its in-house Brent oil forecast of US$ 55 per barrel in 2017.

Moving forward , whi le improvement is expected in 2017 for the oil and gas sector, HLIB Research believed it has already been reflected in the market value of stocks under its coverage.

“Meanwhile, we do not anticipate major capex upcycle by Petronas in the year due to uncertainty in oil prices,” the research arm said.

On another note, Kenanga Research highlighted that within the local scene, as higher priority is given by

Petronas to downstream and most of them are considered commitment investment, it is unlikely to see further adjustment to it at the expense of upstream segment should Petronas decide to trim down the group’s capex budget.

“Hence, any cut from upstream space will be dependent on the degree of project maturity and certainty of requirement.

“Petronas has earmarked 10 to 15 greenfield projects and 20 to 25 brownfield projects for 2017 to 2019,” Kenanga Research said.

It also projected that the long- awaited maintenance, construction and modification ( MCM) contract amounting to RM5 billion is likely to be out in 2Q17.