Oil & Gas Sector - Petronas to cut dividends this year? OVERWEIGHT

- Petroliam Nasional Bhd’s (Petronas) group chief executive officer Datuk Shamsul Azhar Abbas has said that the group plans to lower its annual dividend to the government by RM2bil to RM28bil this year. This is to enable the group to retain sufficient reserves to invest further in exploration against the backdrop of the country’s declining oil & gas production.

- Shamsul had also indicated last year that Petronas wished to cap its dividend payout to 30% of its CY13F net profit, vs. 55% in FY11, 74% in FY10 and 57% in FY09. Including royalties and taxes, Petronas’ payments amounted to RM66bil (See Chart 1) or 36% of the government’s 2011 revenues. 

- While Petronas’ capex has declined by 21% from the peak of RM44bil in FY09 to RM34.9bil in FY11 (See Chart 2), this stemmed largely from the aftermath of the 2008-2009 global financial crisis and project deferments amid the resulting turbulence in crude oil and raw material prices, rather than from any group cash flow issues.

- It is uncertain whether the government will agree to Petronas’ dividend reduction request, given the government’s efforts to narrow the budget deficit. But given Petronas’ net cash pile of RM112bil and shareholders’ funds of RM288bil as at 31 December 2011 and operating cash flows of RM71bil in FY ended March 2011, we do not expect the group’s capex plans to be significantly affected if the government did not approve Petronas’ proposal for this year.

- Petronas spent RM41bil in capital expenditures in CY11 and RM34.9bil in FY ended March 2011. Given that Petronas is committed to spend RM300bil in 2011-2015, the capital expenditure in 2011 was 32% below the group’s average annual spending target. 

- Hence, we remain convinced that Petronas is poised to reaccelerate its contract rollouts over the next few months to meet the deadlines of major projects, such as the RM15bil fast-tracked programme to develop gas reserves from a cluster of fields in the North Malay basin, off Peninsular Malaysia, as well as other enhanced oil recovery (EOR) jobs in East Malaysia. The North Malay basin comprises seven fields – Bergading, Zetung, Gajah, Melati, Kamelia, Angerik and Kezumba.

- Besides the extension of ExxonMobil’s EOR projects from Tapis to Seligi, Guntong and Semangkok, Shell is also planning the rollout of EOR technologies in two oil field projects offshore east Malaysia which could involve an investment of US$12bil (RM38bil) over 30 years. These cover nine oilfields in the Baram Delta, off Sarawak, and four fields in the North Sabah development area.

- We remain excited about the sector given Petronas’  massive capex programme involving EOR, marginal fields and cluster/deep water developments towards maintaining its oil & gas production, while the government remains committed to its Economic Transformation Programme to create an oil field services hub in the country. Hence, we remain OVERWEIGHT on the sector and retain our BUY calls on MMHE, Bumi Armada, Dialog, SapuraCrest, Kencana Petroleum and Petronas Gas.

Source: AmeSecurities