Petronas' sizeable war chest of RM96.7b up to September sufficient to cover capex and dividend commitment, say analysts

KUALA LUMPUR: Petroliam Nasional Bhd (Petronas) has to decide on how it will strike a balance between three major decisions: capital expenditure (capex) spending, dividend commitment and balance sheet preservation, analysts said.

Petronas had maintained a sizable war chest on its balance sheet, which is sufficient to cover its capex and dividend for 2023, they added.

Given lower dividend commitments of RM32 billion despite a higher average Brent crude oil expectation of US$85 per barrel, it is possible that the national oil company's capex will be hearty in 2024, Maybank Investment Bank Bhd analyst Jeremie Yap noted.

As at end-September this year, Petronas sat on a net cash position of RM96.7 billion, Yap added.

Petronas' total capex in the nine-month period of 2023 (9M23) stood at RM34.3 billion, with 16 per cent allocated for decarbonisation and new energy initiatives.

Maybank IB highlighted that the bulk of the group's capex is usually backloaded in the fourth quarter (Q4) annually.

"Earlier this year, Petronas has mentioned that it has planned a capex of RM300 billion over the next five years (2023-2027), with 20 per cent allocated into decarbonisation and energy transition activities.

"This implies an average of RM60 billion capex annually, with RM48 billion invested into its core hydrocarbon business," Yap noted, when reviewing Petronas' third-quarter (Q3) results ended Sept 30 2023.

Petronas raked in a Q3 2023 net profit of RM22.1 billion, down 23 per cent year-on-year but 17 per cent higher quarter-on-quarter. This brought cumulative 9M23 core net profit to RM62.9 billion or down 13 per cent year-on-year.

Thehigher profit quarter-on-quarter is in tandem with higher average crude oil prices throughout the quarter, with Brent averaging US$86 per barrel in Q3 2023.

"As the Energy Information Administration has forecasted a record-high demand for oil in 2023-2024, we think that the elevated crude oil price environment will stay for the medium-term," Yap said.

Kenanga Research noted tha Petronas' net cash remains sizable at RM97 billion.

Petronas announced that it would pay a total of RM40 billion dividends to the government this year (2022: RM50 billion).

Kenanga Research believes that its cash flow would be more than sufficient to cover both dividends and capex (which is likely to be under RM60 billion this year).

"Moving into CY24, we expect dividends to be slightly lower than RM40 billion and this would provide extra room for Petronas to boost its capex closer to RM60 billion."

On the results, Kenanga Research said Petronas' lower 9MFY23 revenue year-on-year, impacted by weaker product prices in both its upstream and gas divisions. However, the profit decline was mitigated by cost reductions.

"On a positive note, the group's spending in 9MFY23 reached RM34 billion, representing a significant year-on-year increase, with the bulk allocated to upstream activities. The group maintains a sizable war chest on its balance sheet, sufficient to cover its capex and dividend for CY23.

"Looking ahead to CY24, we anticipate a capex ramp up to reach the annual target of RM60 billion, considering the likely lower dividend commitment."

The firm said the higher capex will benefit upstream service providers due to their revenue correlation with capex trends by oil producers.

"Cautiousness prevails in the downstream segment due to uncertainties in global demand and oversupply concerns. Our top picks remain Yinson Holdings Bhd and Dialog Group Bhd," the firm added.

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