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Sector Update

28 August 2017

Oil & Gas Neutral


Petronas Portfolio High Grading Efforts
By Sean Lim Ooi Leong, CFA l sean.lim@kenanga.com.my

Petronass 1H17 core earnings improved by 12% YoY on the back of better performance from
both upstream and downstream segments. Steady cash flow from operations with widening
OCF to capex ratio and improving EBITDA also strengthened its net cash position to
RM63.9b. The recent portfolio reshuffling may not be seen as beneficial to the local upstream
space as not much attention is given as far as the local services players are concerned. This
could be due to the pull-back in capex and opex spending that was disrupted by the volatility
of oil prices in 2Q17, further delaying some of the contracts awards, including MCM, which
was initially anticipated in 2Q17. Meanwhile, we believe the potential disruption leading to
refineries, platforms and terminals shutdown in US caused by Hurricane Harvey is temporary
and thus unable to sustain the run-up in oil prices. We are still maintaining our FY17E Brent
crude forecast of USD51/bbl in view of limited re-rating catalyst to fundamentally lift oil
prices to the USD60/bbl level. Likewise, the support for oil prices is buoyed by higher
magnitude of inventory draw-down on healthy oil demand and consumption. All in, our
preference is still on counters with resilient earnings backed by firm contracts. Keep
NEUTRAL view on the sector with positive bias with WASEONG (OP; TP: RM1.10) as our top
pick for the quarter.
2Q17 core PAT inched marginally YoY. Sequentially, Petronas core PAT was down
6% to RM9.8b from RM10.5b in 1Q17 in tandem with revenue falling by 16% as a
result of lower realised prices (Brent prices -7% QoQ, JCC prices +15% YoY) and
lower sales volume for oil & condensate and LNG. Petronas core earnings in 2Q17
improved by 2% YoY to RM9.8b from RM9.7b in 2Q16, thanks to higher average
realised prices recorded (Brent prices +9% YoY, JCC prices +66% YoY),
strengthening of USD against Ringgit (+8% YoY) offsetting lower sales volume for
crude oil and condensate and petroleum products. Cumulatively, 1H17 core earnings
also improved by 12% to RM20.2b backed by 18% revenue growth due to higher
average realised prices masking steeper amortisation of oil & gas properties and tax
expense.
Healthier balance sheet. Despite EBITDA falling 16% QoQ in tandem with weaker prices, the margins were sustained at 39.9%
in 2Q17, improving from 37.8% in 2Q17 thanks to consistent cost optimisation. With that, cumulatively, we saw its controllable
opex cost softening by 3% YoY and operating cash flow (OCF) in 1H17 strengthening by 56%. Meanwhile, Petronas spent
RM9.4b on capex in 2Q17 (-21% QoQ, -32% YoY), bringing its 1H17 capex spending to RM21.2b (-16% YoY) of which the bulk
of it was attributable to committed investment in RAPID (at 70% completion as of June 2017). Meanwhile, RM6.5b dividend was
paid in 2Q17 as expected, but in line with better earnings, Petronas has increased its commitment by RM3.0b to pay total
dividends of RM16.0b this year. Net cash position has improved to RM63.9b from RM59.2b as of 1Q17 coupled with stronger
OCF widening its OCF to capex ratio to 2.3x from 1.5x as of 1Q17.
Both upstream and downstream segments improved in 1H17. Operationally, both upstream and downstream segments
fared better in 1H17. Downstream earnings improved 46% underpinned by higher petrochemical sales (from SAMUR) despite
lower crude and petroleum products sales while upstream segments returned to the black thanks to cost re-basing and increase
in production in MLNG supply system offsetting lower Iraq production entitlement, lower activities in Canada and higher decline
rate in Malaysia-Thai Joint Development AREA and Egypt. Moving forward, Petronas expects production cost per unit of
USD6.8/bbl in FY17.
Portfolio reshuffling. Following the abandonment of the Pacific NorthWest LNG project at Port Edward in British Columbia,
Canada, Petronas is exiting blocks 01 and 02 in the Cuu Long basin, Vietnam upon the expiry of PSC next month as well as
Algeria, which are deemed to be less profitable ventures. Even so, being the third largest global LNG player, Petronas remains
committed to developing its LNG business and growing its international businesses in a longer run amidst an unexciting oil price
environment. Petronas has recently expanded its exploration portfolio with the award of shallow water Block 6 in the Gulf of
Mexicos Salina Basin in a 50:50 partnership with Ecopetrol, Colombias national oil company. We view this as a positive
strategy for the oil major to continue its growth trajectory, but it may not be seen benefiting the local upstream space as not
much attention is given as far as the local services players are concerned. This could be due to the pull-back in capex and opex
spending that was disrupted by the volatility of oil prices in 2Q17, further delaying some of the contracts awards, including MCM,
which was initially anticipated in 2Q17.
Retain NEUTRAL. We believe the potential disruption leading to refineries, platforms and terminals shutdown in US caused by
Hurricane Harvey is temporary and thus is unable to sustain the run-up in oil prices. We are still maintaining our FY17E Brent
crude forecast of USD51/bbl in view of limited re-rating catalyst to fundamentally lift oil prices to USD60/bbl level. Likewise, the
support for oil prices is buoyed by higher magnitude of inventory draw-down on healthy oil demand and consumption. All in, our
preference is still on counters with resilient earnings backed by firm contracts. Keep NEUTRAL view on the sector with positive
bias with WASEONG (OP; TP: RM1.10) as our top pick for the quarter.

PP7004/02/2013(031762) Page 1 of 5
Oil & Gas Sector Update
28 August 2017

Income Statement

2Q 1Q Q-o-Q 2Q Y-o-Y 6M 6M Y-o-Y


Y/E: Dec (RMmn) FY17 FY17 Chg FY16 Chg FY17 FY16 Chg
Turnover 51,632.0 61,655.0 -16.3 46,945.0 10.0 113,287.0 96,071.0 17.9
EBITDA 20,604.0 24,616.0 -16.3 17,749.0 16.1 45,220.0 33,354.0 35.6
Operating Profit 11,969.0 16,138.0 -25.8 3,980.0 200.7 28,107.0 11,329.0 148.1
Interest expense -903.0 -857.0 5.4 -860.0 5.0 -1,760.0 -1,645.0 7.0
JV & Associates -486.0 201.0 -341.8 213.0 -328.2 -285.0 427.0 -166.7
Pretax profit 10,580.0 15,482.0 -31.7 3,333.0 217.4 26,062.0 10,111.0 157.8
Taxation -3,525.0 -5,186.0 -32.0 -1,652.0 113.4 -8,711.0 -3,863.0 125.5
Minority interest -1,872.0 -2,091.0 -10.5 -1,268.0 47.6 -3,963.0 -3,161.0 25.4
PATAMI 5,183.0 8,205.0 -36.8 413.0 1,155.0 13,388.0 3,087.0 333.7
PAT excluding identified
items 9,818.0 10,473.0 -6.3 9,656.0 1.7 20,291.0 18,045.0 12.4

EBITDA margin 39.9 39.9 37.8 39.9 34.7


EBIT margin 23.2 26.2 8.5 24.8 11.8
Pretax margin 20.5 25.1 7.1 23.0 10.5
Core Net margin 19.0 17.0 20.6 17.9 18.8
Effective tax rate -33.3 -33.5 -49.6 -33.4 -38.2

Source: Company

Segmental Breakdown

2Q 1Q Q-o-Q 2Q Y-o-Y 6M 6M Y-o-Y


FY17 FY17 Chg FY16 Chg FY17 FY16 Chg
Revenue
Upstream 24,264.0 30,473.0 -20.38 21,939.0 10.6 54,737.0 46,411.0 17.9
Downstream 24,191.0 26,981.0 -10.34 22,701.0 6.6 51,172.0 43,503.0 17.6
Corporate and others 3,177.0 4,201.0 -24.38 3,800.0 -16.4 7,378.0 7,652.0 -3.6
Total 51,632.0 61,655.0 -16.26 48,440.0 6.6 113,287.0 97,566.0 16.1

PAT
Upstream 4,775.0 6,313.0 -24.36 -3,709.0 -228.7 11,088.0 -1,438.0 -871.1
Downstream 2,253.0 2,857.0 -21.14 2,258.0 -0.2 5,110.0 3,359.0 52.1
Corporate and others -970.0 747.0 -229.85 1,025.0 -194.6 -223.0 1,472.0 -115.1
Total 6,058.0 9,917.0 -38.91 -426.0 -1,522.1 15,975.0 3,393.0 370.8

Net Margin
Upstream 19.68% 20.72% -16.91% 20.26% -3.10%
Downstream 9.31% 10.59% 9.95% 9.99% 7.72%
Corporate and others -30.53% 17.78% 26.97% -3.02% 19.24%
Total 11.73% 16.08% -0.88% 14.10% 3.48%

Source: Company

PP7004/02/2013(031762) Page 2 of 5
Oil & Gas Sector Update
28 August 2017

Petronas Quarterly Capex Petronas Yearly Capex


25,000 80% 70 120%
64.6 64.7

60% 60 100%
56.6
20,000
50.5 80%
40% 50
45.6
44.0
60%
15,000
20% 40 37.6 37.1
34.9
40%

0% 30
10,000 20%

-20%
20
0%
5,000
10 -20%
-40%

0 -40%
0 -60%
Q113 Q213 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17
2008 2009 2010 2011 2012 2013 2014 2015 2016

Capex (RM mil) QoQ Growth (%)


RM bil Capex (RM bil) YoY % Changes
RM mil

Source: Petronas, Kenanga Research

Crude Oil, Condensate and Natural Gas Production


2,500.0 15%

2,400.0

10%

2,300.0

5%
2,200.0
kboe/day

2,100.0
0%

2,000.0

-5%

1,900.0

1,800.0 -10%
4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17

Crude Oil, Condensate and Natural+'Operational data'!$196:$196 Gas Production QoQ Growth (%)

Source: Petronas, Kenanga Research

LNG Sales Volume Average Gas Sales Volume


10 25% 3,000 15%

9 20%

2,900 10%
8
15%

7
10% 2,800 5%

6
mil tonnes

mmscfd

5%

5 2,700 0%

0%
4

-5% 2,600 -5%


3

-10%
2
2,500 -10%

1 -15%

2,400 -15%
0 -20%
4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17
4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17

LNG Sales Volume QoQ Growth (%) Average Gas Sales Volume QoQ Growth (%)

Source: Petronas, Kenanga Research

PP7004/02/2013(031762) Page 3 of 5
Oil & Gas Sector Update
28 August 2017

Oil and Gas Sector Comparisons

Est.
Market Hist. CY17 NP CY18 NP Target
Price PER (x) Div. P/BV Net Profit (RMm) Rating
NAME Cap ROE Growth Growth Price
Yld.
(RM) (RMm) CY16 CY17 CY18 (%) (%) (x) CY16 CY17 CY18 (%) (%) (RM)

ALAM 0.18 161.8 -1.9 -5.2 -8.4 0.0 -15.6 0.2 -84.9 -31.3 -19.3 -63.1 -38.3 0.08 UNDERPERFORM
ARMADA 0.75 4,399.7 -43.4 14.0 10.9 1.3 -30.3 0.8 -101.3 314.6 403.4 -410.6 28.2 0.90 OUTPERFORM
COASTAL 1.20 632.9 9.1 15.5 14.9 0.8 2.8 0.4 69.8 40.8 42.4 -41.6 4.0 1.45 MARKET PERFORM
DAYANG 0.88 849.0 -57.8 57.4 10.0 0.0 9.2 0.7 -14.7 14.8 84.7 200.7 472.3 1.10 OUTPERFORM
DIALOG 1.99 11,220.2 34.9 30.4 28.4 1.4 13.4 3.6 321.6 368.9 395.1 14.7 7.1 2.30 OUTPERFORM
GASMSIA 2.95 3,787.8 21.8 22.3 21.7 3.4 17.2 3.7 168.5 165.3 169.9 -1.9 2.8 3.18 MARKET PERFORM
MHB 0.65 1,032.0 -737.1 -52.1 47.3 0.0 -6.0 0.4 -1.4 -19.8 21.8 -1314.3 210.1 0.65 UNDERPERFORM
PANTECH 0.64 474.9 15.3 10.7 9.5 3.6 7.0 0.9 31.1 44.3 49.9 42.5 12.6 0.75 OUTPERFORM
PCHEM 7.18 57,440.0 18.1 15.5 14.6 3.2 15.8 2.1 3,173.0 3,701.3 3,924.0 16.7 6.0 7.85 OUTPERFORM
PETDAG 24.14 23,982.0 24.0 23.6 22.6 3.0 19.4 4.5 998.9 1,017.7 1,060.2 1.9 4.2 26.70 OUTPERFORM
PETGAS 18.88 37,358.5 21.5 21.5 19.8 3.3 14.9 3.1 1,738.7 1,740.0 1,889.3 0.1 8.6 22.00 OUTPERFORM
SENERGY 1.46 8,748.5 31.1 58.4 51.9 0.7 1.0 0.7 281.4 149.7 168.4 -46.8 12.5 1.80 MARKET PERFORM
UZMA 1.32 422.4 14.7 12.0 10.5 0.0 7.3 1.1 28.7 35.3 40.3 23.0 14.2 1.65 OUTPERFORM
WASEONG 0.99 765.1 -11.4 10.3 9.3 2.0 -22.9 1.0 -67.4 74.5 82.7 210.5 11.0 1.10 OUTPERFORM
YINSON 3.64 3,961.0 17.4 13.4 13.4 0.4 10.4 1.6 227.8 295.7 296.4 29.8 0.3 4.05 OUTPERFORM

Simple Average -42.9 16.5 18.4


Weighted Average 25.6 23.0 14.4
Source: Bloomberg, Kenanga Research

PP7004/02/2013(031762) Page 4 of 5
Oil & Gas Sector Update
28 August 2017

Stock Ratings are defined as follows:

Stock Recommendations

OUTPERFORM : A particular stocks Expected Total Return is MORE than 10%


MARKET PERFORM : A particular stocks Expected Total Return is WITHIN the range of -5% to 10%
UNDERPERFORM : A particular stocks Expected Total Return is LESS than -5%

Sector Recommendations***

OVERWEIGHT : A particular sectors Expected Total Return is MORE than 10%


NEUTRAL : A particular sectors Expected Total Return is WITHIN the range of -5% to 10%
UNDERWEIGHT : A particular sectors Expected Total Return is LESS than -5%

***Sector recommendations are defined based on market capitalisation weighted average expected total
return for stocks under our coverage.

This document has been prepared for general circulation based on information obtained from sources believed to be reliable but we do not
make any representations as to its accuracy or completeness. Any recommendation contained in this document does not have regard to the
specific investment objectives, financial situation and the particular needs of any specific person who may read this document. This
document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees.
Kenanga Investment Bank Berhad accepts no liability whatsoever for any direct or consequential loss arising from any use of this document
or any solicitations of an offer to buy or sell any securities. Kenanga Investment Bank Berhad and its associates, their directors, and/or
employees may have positions in, and may effect transactions in securities mentioned herein from time to time in the open market or
otherwise, and may receive brokerage fees or act as principal or agent in dealings with respect to these companies.

Published and printed by:

KENANGA INVESTMENT BANK BERHAD (15678-H)


Level 12, Kenanga Tower, 237, Jalan Tun Razak, 50400 Kuala Lumpur, Malaysia Chan Ken Yew
Telephone: (603) 2172 0880 Website: www.kenanga.com.my E-mail: research@kenanga.com.my Head of Research

PP7004/02/2013(031762) Page 5 of 5