Malaysia Oil & Gas - PETRONAS’ 1Q16 report card

Author: kltrader   |   Publish date: Thu, 19 May 2016, 11:39 AM 

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Key takeaway: Above water at USD34/bbl

PETRONAS’ weak 1Q16 results were expected and clearly expose the dire state of the industry – low oil price level, cost/ capex cuts, reduced activities, cancellations and deferments, just to name a few. However, the key positive from this is that PETRONAS is profitable at USD34/bbl. We remain Neutral on the sector. A concerted cut in global oil production is key to a re-look of the sector. From the equity market’s perspective, volatility offers multiple trading cycles, especially on high-beta, beatendown stocks. Our fundamental BUYs are Yinson, BArmada, KNM, SAKP and Dialog.

1Q16 core earnings fell 67% YoY

The 26%/56%/60%/67% YoY fall in revenue/EBIT/ pretax profit/ core net profit to MYR49b/MYR8b/ MYR6b/MYR4b respectively in 1Q16 largely corresponded to the 37% fall in crude oil price of USD34/bbl (dated Brent). This was offset by a: (i) 9% increase in production (to 1,815k boe/d) and (ii) favourable exchange rates. Segment-wise, both the upstream and downstream businesses reported lower YoY earnings, down 71%/42% respectively, on lower prices (crude and LNG), sales volume (LNG) and margins (refining, marketing).

Negative FCF, lower capex YoY

Net cash level declined marginally (-1% YoY) to MYR62b as at Mar 2016. Operating cashflow contracted by 44% YoY to MYR10b, which saw PETRONAS plunging into a negative FCF level in 1Q16 (–MYR1b), on a lower YoY capex spend of MYR11b (-7% YoY) on RAPID and E&P activities in Canada and Azerbaijan). 80% of capex was domestic-centric.

Targeting to be lean and nimble

PETRONAS remains cautious on the outlook, on expectation of a prolonged low and volatile oil price environment. It is adopting lean management, aiming to reduce its capex/opex by MYR15b-20b in FY16, which encompass 30%-40% of its targeted MYR50b capex/opex cut over the next 4 years (2016-2019). This will be undertaken via revision/ negotiation of contracts and cost optimization efforts. Some capital projects (i.e. FLNG2) may see delay in implementation as PETRONAS undertakes cashflow preservation/capital discipline/cost management.

Capex vs. dividends: May tap into the debt market

Unlike the previous years, PETRONAS stressed that its operating cash flow is insufficient to cover its capex and dividend commitments to the Government, which is already apparent in this 1Q16. For that, it does not rule out the possibility of tapping into the debt market and gearing up, if necessary, to fund its capex commitment. Recall that PETRONAS has committed to pay MYR16b in dividends in 2016, which is based on FY15 profits.
Source: Maybank Research - 19 May 2016