Cautious sentiments on Petronas stocks
Khairul Khalid 
Petronas Dagangan, which operates petrol stations nationwide, tripled its net profit in the third quarter

Rising crude oil prices have provided a shot in the arm for national oil company Petroliam Nasional Bhd’s (Petronas) listed units but not all of them have benefited.

Petronas Dagangan Bhd (PetDag) and Petronas Chemicals Bhd (PetChem) posted earnings growth for the third quarter ended Sept 30, 2017, but Petronas Gas Bhd (PetGas) was down marginally. An analyst says although the spike in oil prices has boosted oil and gas players, the market is still in cautious mode.

“Certainly, the recent rise in oil price is positive news for Petronas, but overall the market is still cautious about oil & gas stocks in general.

“US shale production is proving to be a strong long-term counterbalance to any crude oil price hikes. Any upshot caused by production shortage of Organisation of the Petroleum Exporting Countries (Opec) is likely to lead to a correction caused by an increase in shale output,” says an analyst.

Petronas’ retail arm PetDag was one of its star performers in Q3FY17, registering a net profit of RM761.73 mil, three times higher year-on-year due to higher sales volume, better margins and gains on the disposal of a subsidiary. Revenue also rose 22.1% to RM6.69 bil due to a 3% increase in sales volume and an 18% rise in average selling price.

Although not as spectacular, PetChem posted a 2.47% growth in net profit of RM913 mil in Q3FY17, due to higher production and sales volume upon commissioning of its Sabah Ammonia Urea (SAMUR) plant in May this year.

However, PetGas did not fare as well with its net profit down 1.2% to RM417.43 mil in the quarter just ended. The company attributes this to the completion of capital projects and higher utilities cost of sales arising from upward fuel gas price revisions effective Jan 1 and July 1.

Overall, Petronas’ good Q3FY17 performance for its listed units could be hampered by the fact that the rise in oil price could be temporary.

Brent crude oil price has averaged at US$54.5 (RM227.9) per barrel this year but has risen 13% since Sept 30 this year to breach US$64/barrel on Nov 6, its highest in two years. It closed at US$61.87 on Nov 15.

According to statistics by the US government, US shale production for December would rise for a 12th consecutive month, increasing by 80,000 barrels per day (bpd).

In its 2018 outlook, Fitch Ratings states that average oil prices will be broadly unchanged year-on-year and that “the recent price recovery with Brent exceeding US$60 per barrel may not be sustained”.

Fitch Ratings says that the recent oil price recovery might not sustain in 2018

Concerns over PetDag’s growth prospects

Market analysts are equally conservative, with AllianceDBS Research maintaining its “hold” recommendation for PetDag in its report this month. PetDag is the principal marketing arm for Petronas and is the retailer and marketer of its downstream products. It operates over 1,000 Petronas petrol stations and 725 retail Kedai Mesra nationwide.

“Given the maturity of the industry and potential earnings downside risks arising from further sector liberalisation, we do not foresee any near-term re-rating catalyst for the stock at this juncture,” says the report.

PetDag’s operating profit from its retail segment improved by 47% year-on-year to RM264 mil in Q3FY17, boosted by inventory gains with crude oil price rising by more than 20% during the quarter.

“Sales volume, however, dropped by 4% due to challenging operating environment, some of the diesel customers switching from retail to commercial market, and upgrading and improvement activities done by PetDag, which resulted in temporary closures of some of its stations,” says the report.

AllianceDBS is also concerned about the growth prospects of PetDag’s retail industry, in view of the increased popularity of the fuel-efficient and electrical vehicles, improved public transport infrastructure in Malaysia with the mass rapid transit (MRT) system, and rising acceptance of e-hailing services such as Uber and Grab.

On the other hand, it has a higher dividend per share (DPS) assumption for PetDag as its strong balance sheet, curtailed expansion plan and strong cash flows generation would allow the group to pay out higher dividends.

The research company is expecting a 35 sen special dividend for PetDag shareholders. This is due to the fact that the company has made several divestments during the FY17, which includes its entire equity stake in Petronas Energy Philippines, 40% equity stake in Duta, Inc, and 100% stake in Thang Long LPG Company in Vietnam.

PetDag has realised net gains of RM431 mil (43 sen/share) from these disposals while receiving RM552 mil net cash proceeds.


Better outlook for PetChem

Another research report by AmInvestment Bank is more optimistic about PetChem, maintaining its ”buy” recommendation on the company with unchanged forecasts and fair value of RM8.35/share.

With a total combined production capacity of 10.8 million metric tonnes per annum (mtpa), PetChem is involved primarily in manufacturing, marketing and selling a diversified range of chemical products, including olefins, polymers, fertilisers, methanol and other basic chemicals and derivative products.

PetChem also produces a chemical called citral and its precursors, such as citronellol and L-menthol for the flavour and fragrance industries. The chemicals are used in home and personal care products, fine fragrances, food and pharmaceutical applications. The report also states that the group’s Q4 plant utilisation is likely to be stable.

“While a major cracker turnaround activity is scheduled in Q3FY18, management expects to achieve an overall average plant utilisation rate of over 90%, similar to 91% in the first nine months this year (M9FY17).

AmInvestment says that PetChem’s Q4FY17 plant utilisation is likely to be stable given that there was a methanol turnaround activity, which is expected to be completed soon. The group’s capital expenditure (capex) for FY17 is expected to be over 20% higher than RM4 bil last year vs. RM3.5 bil in M9FY17, which is roughly in line with its expectations.

The research house expects PetChem’s product prices to be buoyant in Q4FY17 with a strong correlation to the rise in Brent crude oil prices.

“So far in Q4FY17, naphtha has risen 10% while methanol increased by 7%, benzene and urea 5% and polyethylene 1%. Although paraxylene slid by 4% and polypropylene 3%, we maintain our view that the general trend has turned more positive,” says AmInvestment.


PetGas share price sliding

The outlook for PetGas, though, is less rosy with AmInvestment maintaining its “sell” recommendation on the company.

“Since our downgrade from “hold” on Nov 18 last year, the share price has fallen by 18% on concerns of value erosion from the Energy Commission’s (EC) plan to implement Incentive-Based Regulation initiatives on the group’s gas transportation tariff under the Gas Supply Act 2016,” says AmInvestment.

The company is the country’s leading gas infrastructure and utilities company with core businesses in gas processing and utilities and gas transmission and regasification.

It processes Petronas’ natural gas piped from offshore fields, and transports the processed gas via Peninsular Gas Utilisation pipeline network to Petronas’ customers in Malaysia and Singapore. The company also supplies steam and industrial gas for its customers at Kertih Integrated Petrochemical Complex in Terengganu and Gebeng Industrial Area in Pahang.

The research house says that PetGas did not provide much clarity on the third-party access (TPA) negotiation with the EC other than reaffirming that it is working with the authorities to minimise the impact to its business operations.

The TPA negotiation with the EC is still ongoing while the group’s licence submissions for the Peninsular Gas Utilisation system together with the Melaka and Pengerang regasification terminals were made on Oct 24 this year.

“Even though the effective date of the TPA will be by Jan 16 next year, management is not able to provide any clarity on the timeline of the EC’s decision or the tariff structure,” says AmInvestment.

This article first appeared in Focus Malaysia Issue 259.