PETRONAS Gas Berhad (PETGAS) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the PETRONAS Gas Berhad Q1 FY 2021 Analyst briefing. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your first speaker today, Izan Hajar Ishak. Thank you. Please go ahead.

Thank you, Rochelle. [Foreign Language] And good evening, everyone. Thank you for joining our session today for PETRONAS Gas Berhad analyst briefing for quarter ended 31st March 2021. I'm Izan from Investor Relations. I hope it's not too late to wish Selamat Hari Raya, Maaf Zahir Batin who everyone managed to celebrate this activity in the best way that we can. With us from PGB, we have Encik Abdul Aziz Othman, Managing Director and CEO; Puan Shariza Sharis Mohd Yusof, CFO; and Encik Abdul Razak Saim, Head of Business Development and Commercial. For your information, we are all on full virtual mode today, dialing in from our respective homes. Therefore, please excuse any disturbances that may come our way during the session today. Okay. We will start the briefing with highlights, company performance update and to be followed by Q&A. For reference, our financial results is available at both Bursa Malaysia and PGB website. The presentation material for today's analyst briefing is also available at our website and at the webcast host platform. Without further ado, I'll hand over to Encik Aziz to start the briefing. Aziz?

Thank you, Izan. Everybody can hear me, right?

Yes. We can hear you.

Okay. [Foreign Language] And good evening, everyone. Again, Selamat Hari Raya, if it's not too late. And of course, with the situation with COVID, please stay safe, everybody. First, foremost, let me start the briefing with the external environment and challenges that we have to navigate during this -- to run the business during this first quarter. So during the period, as you can see from the slide, Malaysian GDP recorded better-than-expected performance of still negative territory, minus 0.5%, despite the imposition of MCO 2.0 during the quarter. The industrial production index, IPI, grew to 9.3% in March 2021 as compared to the same month of the previous year. The growth of IPI in March 2021 was mainly driven by manufacturing and electricity index, which increased 12.7% and 10.3%, respectively [Audio Gap] compared to the same period last year. During the MCO last year, the total gas demand was around 1,500 or thereabouts. But this year, despite the imposition of MCO 3.0, the gas demand has still stayed at a normal level of about 2,000 to 2,100. So the demand is sustaining. And as far as COVID situation, movement continue to be restricted. Later, we'll show how we are responding to this corporation wise. Of course, you can see from the slide, compared to last year the number of cases of COVID at the start of MCO last year, around 100, then the country or the government managed to reduce it to very low level of about 24. But today, it has gone back to more than 1,000 and of course, in this period, has gone to almost 5,000. Today, the last I heard about just now has gone above 7,000 to about 7,200. So the challenges is much higher than what we experienced before. But despite the much higher cases of COVID, so far our barrier management is successful with manageable cases for our staff. Very, very minimal cases has been experienced throughout our operation, okay? If we can go to the next slide. So how did we do in the midst of these challenges in the first quarter of 2021. Our business was operating as usual despite the challenges that I mentioned from the perspective of health matter and economic condition. Operationally, our plant and facilities sustained high reliability across all our business segments, resulting in the gas processing business, achieving the agri target incentives. Also, earlier this year, in January, we successfully launched our first remote operation center, what we call ROC at our Kerteh site in Terengganu. The ROC is able to monitor our utilities operation in Gebeng, Kuantan, remotely from Kerteh, and this initiative was made possible by leveraging on technology has actually facilitated our transition towards having a consolidated view of our operation to increase efficiency and effectively. By October this year [Foreign Language] we will have full remote operation of Gebeng from our Kerteh facilities. Commercially, PGB is supported by our long-term agreement with PETRONAS and other customers with the certainty of gas processing agreement and the tariff imposed toward the contract on the regulated business, i.e., the gas transportation and regasification. About 90% of our earnings should remain steady for the next 2 years. In addition, while we have the steady revenue, we have new income from ancillary services that serve to complement our core businesses. We also played a key role in the third-party access as we successfully unloaded another third-party LNG cargo regasified and deliver it to the designated customer. During the first quarter briefing, I mentioned about growth. So as for growth, we are focusing on exploring new opportunities, work on the lateral gas pipeline to Pulau Indah, which we have announced in February is progressing as planned. [Foreign Language] the first lane of the pipe should commence sometime in August. We are also working on relocating 2 of our compressors to debottleneck the southern region pipeline to meet the demand, for which we have seen increase tremendously in the southern sector. So again, for the growth, more projects is in the pipeline, and we will announce accordingly in due time. If we can move further to the next slide. Looking at financials, for the quarter ended 31st March 2021, PGB recorded MYR 1.3 billion revenue, lower than the preceding and the same quarter last year. This was mainly due to lower revenue from the Utilities segment, which depending on the gas plants, which was lower, so in such case affecting the sales price to customers. As you all are aware, the fuel gas price was based on the regulated price in reference to market price. Nevertheless, despite low revenue, the group gross profit was higher at MYR 712 million on the back of lower operating costs across all segments. Consequently, the profit after tax was also higher at MYR 540 million as the higher gross profit was further supported by favorable foreign exchange movement compared to the same quarter last year. Later Sharis will be presenting more details on our financials. If we can go to next slide on operational excellence. So -- okay, we are on the slide. The operation at our gas processing plant continue to operate as usual. This is despite the MCO, as I've mentioned. The OEE, or the overall equipment effectiveness, remain within range for both C1 and C2 product. We achieved 99.9% salesgas reliability, which demonstrated our commitment to the customers. The high level efficiency also resulted in almost -- in about MYR 24.2 million of performance incentive shift. The incentive consist of ability to produce ethane, propane and butane on sustainable basis as well as internal gas consumption. So this achievement also was leveraged on digital initiative that we have undertaken. And one of the thing that we have done was having technical center where we monitor all critical equipment parameters and catching whatever the potential issues with the equipment and tackling it before it becomes an issue and subsequently tripping the plant. So those achievements in digital initiative has contributed to this performance incentive, as I mentioned. If we can move on to the next slide on the gas transportation and regasification So pipeline network reliability was sustained at 100%, and for the quarter, we delivered an average of 1.96 billion standard cubic feet per day of salesgas to customers. For the regasification business, both RGT Sungai Udang and RGT Pengerang sustained each OEE level at 100%. And during the quarter, as I mentioned just now, RGT Sungai Udang received 1 cargo while RGT Pengerang received 5 cargoes, making it a total of 6 cargoes received so far for the year. If I then move to the next slide. On utilities, during the quarter, there was lower volume of electricity delivered due to low offtake from our customer compared to the same quarter last year. If everybody can recall, last year, first quarter, there was no MCO. So this year, we are still stuck with MCO or whatever form of movement restriction that has been happening throughout the last 1 year. On the other hand, the offtake of steam has increased in line with the first delivery to our new customer, Polyplastics Asia in quarter 4 last year. As for industrial gases, the higher volume was mainly because of lower offtake in quarter 1 2020, mainly due to customer turnaround at that time. Overall, we continue to fulfill the customers' demand with 100% product delivery reliability recorded across all products. So ladies and gentlemen, that's all for operational performance. We will next move to financial segment with Sharis. Over to you, Sharis.

Well, thank you, Encik Aziz. [Foreign Language] And a very good evening, everyone. I do hope everyone is keeping well under the circumstances. Selamat Hari Raya as well to those celebrating. So I will be taking you through the financials. If you could turn to Page 14, we will start with the segmental performance for Gas Processing segment. In quarter 1 2021, as articulated by Encik Aziz, the business continues to run despite these several cases of MCO imposed by the government. Against the preceding quarter, quarter 4 2020, we saw slightly higher revenue at MYR 479 million, while gross profit improved by 8% to MYR 243 million, mainly due to lower operating costs. Against the corresponding quarter, quarter 1 2020, revenue remained comparable. Segment results improved by 9% also on the back of lower operating costs. Moving on to Gas Transportation segment on Page 15. Under the incentive-based regulation, the regulatory period 1 or RP1 tariff for the PGU pipeline network remains unchanged for 2021. Comparing against last year at quarter 4 2020, we saw slightly lower revenue by 2% at MYR 288 million, principally due to lower number of opportunities, while gross profit rose by 14% to MYR 198 million, mainly due to lower operating costs. This compares to the preceding quarter, where we saw a higher level of operations and maintenance activities undertaken. Against the corresponding quarter or same period last year quarter 1 2020, revenue was also slightly lower by 2%, similarly due to lower number of operating days, while segment profit was higher by 5%, again due to lower operating costs. This include a lower internal gas consumption or IGC cost. Moving on to regasification on Page 16. Similarly, the RP1 tariff remain unchanged for the year for both our regasification terminal. Compared to the preceding quarter, quarter 4 2020, we saw a decline in revenue by 2% to MYR 348 million. Again, this was really due to the lower operating days in terms of calendar days at both RGT facilities, while segment results increased by 20% to MYR 197 million has been recorded lower operational expenses. Against the corresponding quarter, quarter 1 2020, we saw a slight improvement in terms of revenue by 1%. This is in line with the introduction of new revenues stream, mainly the LNG reloading for bunkering at our Sungai Udang regasification terminal and also the LNG truck loading activities at the Pengerang regasification terminal. Gross profit increased by 19% on the back of low operating costs, mainly in relation to IGC or internal gas consumption. Last but not least, for utility, the segment was recently affected by the reduction of -- or lower fuel gas price following the changes in pricing from regulated price to reference market price, which took effect 1st November 2020. As far as the utilities revenue is concerned, for all of our products, we are allowed to pass-through the fuel gas cost due to the pricing structure, with the exception of electricity because electricity price is regulated. So when there is lower reduction in fuel gas price, which was the case in quarter 1, the margin for our electricity volumes benefited from the movement, and hence, we saw a favorable movement in terms of gross profit. So comparing the quarter against preceding quarter, quarter 4, although revenue was lower by 13% due to the lower product prices, segment gross profit remained comparable because we saw lower operating costs in addition to the fuel gas cost. This mitigated the lower revenue impact. Against quarter 1 2020, similar trending. Revenue was also lower by 15%, again due to the impact of the fuel gas price on the pricing of oil products, although we did registered higher sales volume. In comparison, our segment gross profit surged by 127%. As mentioned, this is due to the favorable margin impact of the lower fuel gas on our electricity as well as lower depreciation expense. So on the next page, we have the impact at group level. Just to elaborate a bit on what Encik Aziz had already mentioned earlier. Against preceding quarter, quarter 4 2020, group revenue was MYR 1.34 billion, lower by 4% due to the lower revenue from utility segment. As mentioned, this was the lower product prices to customers. Gross profit, nevertheless, improved by 12% to MYR 712 million on the back of lower operating costs. This was in relation to fuel gas costs and other costs such as repair and maintenance across the segment. Gross profit after tax was correspondingly higher by 4% at MYR 540 million because we saw the high gross profit being supplemented by higher share of profit from joint venture companies, offset to some extent by unfavorable impact of foreign exchange movements. Against corresponding quarter of same period last year, quarter 1 2020, we saw a slight decline in revenue by 4%, mainly due to lower revenue from Utilities segment, as explained previously. Gross profit however improved by 17% because we saw all segments recording higher contribution with lower operating costs relating to fuel gas, internal gas consumption as well as distribution. Our profit for the quarter grew by 55% because the higher gross profit was further offset by favorable foreign exchange movement. On the next slide, Page 19. This is the balance sheet that remains robust with over MYR 18 billion in total assets as at 31st March 2021, while cash or equivalents stand at over MYR 3 billion. In terms of distribution of group segmental assets, this was similar to previous quarter. On Page 20, dividend. The Board has approved, as you are aware, the set interim dividend of MYR 0.16 per share, which amounts to MYR 216.6 million, which will be payable on 21st of June 2021. The interim dividend demonstrates our commitment to ensure a sustained level of returns for our shareholders, despite the challenges as mentioned by Encik Aziz earlier. So with that we end the financial session. I will now pass the line over to Encik Aziz to say on our company update.

Thank you, Sharis. Moving on to updates. Page 22, please. So as part of a series of upcoming growth opportunities, our latest project is expanding our southern peninsular gas utilization capacity to meet the increase -- the increasing gas demand in southern region of Peninsular Malaysia. We plan to increase the pipeline capacity, which is currently fully utilized. If you look at the map, the southern sector in red, that's where the pipeline is actually fully utilized. So the demand growth in that sector is quite bullish. So to meet the customer demand there, in terms of high-pressure requirement as well as additional volume, we have sanctioned this project, and the project is currently ongoing and expected to be completed by July 2022. The project has been approved by Suruhanjaya Tenaga also. And therefore, the cost recovery will be part of RP2 tariffs. Following the expansion of the debottlenecking exercise, we anticipate that there will be opportunities for new gas demand from the southern area. On our part, PGB look forward to cater for the expected demand in the near future. Previously, we also talked about the prospect in power industry. Happy to say that we are currently in discussion with relevant parties to frame some of the potential opportunities that we have identified. We will provide more details once these are set and in place potentially [Foreign Language] in the next briefing. To the next slide, Izan? Okay. I close -- that is the presentation. So we can move on to question-and-answer then. Thank you.

Rochelle, if you can start with the question and answer. Any question from the callers?

[Operator Instructions] We have our first question from Alex Goh of AmBank.

Congratulations for a strong set of results. I have a number of questions. Maybe I'll just run through 1 at a time. First is regarding your CapEx for this year and next year. And also to final -- for your debottlenecking project at the southern pipeline, how much would that actually cost? And how much would that add to your CapEx, bearing in mind as well your pull out in that project as well.

Maybe, Sharis, can you take the question?

Yes. Sure. Yes, thanks for the question, Alex. CapEx for 2021 this year is expected to be around -- between MYR 1.2 billion to MYR 1.3 billion. Again, this takes into consideration the projects which we have announced, which is the 42-kilometer electro pipeline as well as this debottlenecking project. In terms of 2022 CapEx, we probably will be looking at maybe slightly lower. But again, this depends on the opportunities that Encik Aziz mentioned that we're looking at. So actually, we will be in a better place to guide 2022, probably in the middle of this year once those opportunities -- there's some progress on those opportunities, yes. But generally, it will be slightly lower than -- looking at something slightly lower than 2021 at the moment. In terms of the project cost, specifically for the compressor relocation. Right now, the cost is just under MYR 100 million. Hopefully, that answers the question.

And I think the spending on that -- that CapEx is -- will cover 2 years. So the figure that Sharis mentioned just now has included the total CapEx for this project also. Yes?

Yes. Yes.

Okay. So basically, the debottlenecking project basically means just moving the compressor from 1 place to another. Is that -- it's not like you're building a new pipeline altogether. Am I right?

No -- yes, you're right. The way pipeline systems work, either you build a second pipeline or you put a compressor station. So in this case, we do have compressors that we are not using currently. So it's just moving it to a new place, then that will add in the capacity. In this case, as what was shown in the presentation, it's about additional 150 million scf more.

I see. You've indicated that it will increase your southern PGU capacity about 150 mmscfd, but does that mean it will cannibalize capacity from other parts of your PGU? In other words, your total capacity or revenue is still roughly stable? How should I look at this?

Not really. As I said, we are limited by how much we can push south today. So there are customer who actually request for those gas. The customers in other sectors, for example, for the gas that goes into client value will remain as it is. So if the capacity increased by 150, as I mentioned just now, so mostly it will be consumed by the new customer in southern sector as incremental consumption.

I see. So this will, lastly, benefit your gas Transportation segment. In other side, there will be more throughput from third parties, am I right?

Yes, yes. That is the expectation.

I see. Currently, the gas that you are producing yourself is already currently being taken up by existing customers, am I right?

Can you repeat that?

The gas that you're producing from PETRONAS, the molecules are already designated or allocated to your existing customers.

Yes.

So if you were to increase your capacity by 150 mmscfd, it will have to be new customers and the supply of the gas will be from third parties. Am I right?

It -- if the customer is secured by our shipper, I mean, PGB, then the supply can come either from Kerteh or the LNG terminal. If it is a third party, the third-party seller can bring to one of our regas terminal to supply to whoever the customer that they have locked in with. So it can be either way, yes, what is a new molecule.

I see. Okay. So currently, this third-party customer, is it PETRONAS or -- sorry is it Tenaga? Or is it some other customer like Gas Malaysia?

Hold on. Trying to dissect your question. I think as I mentioned just now, so far, there's 1 shipper that has brought in through our regas Sungai Udang. So, so far, there's one third party supplier. But the rest are from our shipper PETRONAS Energy & Gas Trading.

Any other question from the caller or I'll readout from the webcast.

We do have another question from the line of Chi Wei Tan from Maybank.

A couple of questions from me. Firstly, on the operating costs. I think it seems to be lower this quarter for most of the segments. Presumably due to lower levels of repair and maintenance. Is it the appropriate run rate going forward? Or should we expect repair and maintenance to trend up in the coming quarters? And second question, just to confirm. So the CapEx for both southern debottlenecking and the pullout in that pipeline, so both of those will be -- have not been incorporated in RP1 yet, right? Both are for RP2?

Sharis, can you take the question?

Yes, sure. For the repairs and maintenance, obviously, the low operating cost is not just on repairs and maintenance, but it is one of the larger items. As far as moving forward, again, a lot of it will depend on what happens in terms of the MCO and whatnot. So there may be a little bit of catch-up. But having said that, there are other elements in operating costs, overhead costs on which we have optimized. So that is a portion of that lower operating cost, which will be sustained and that's the target for PGB this year, yes, to kind of sustain throughout the next couple of quarters, yes? Sorry, the next question is on CapEx recovery in RP2. Sorry, can you -- Izan maybe can you -- sorry, my line is -- yes, is really -- can't even hear.

If I'm not mistaken, it was whether the cost has been part of the RP1 tariff, if I understand the question correctly?

Yes, correct.

You mean the cost of -- the operating cost, yes? Or...

The project, the latest project.

The project? Yes. Yes. As mentioned by Encik Aziz, the CapEx recovery will be in the next regulatory period, which is RP2. So not in RP1, yes.

I'll read some of these questions coming in from webcast. From Siew Teng, is the balance sheet optimization still ongoing? Can we expect special dividend in 2021?

So precisely, it's really something that we are always looking at. And as far special dividend, at this moment, there is no such plan. But nevertheless, if there is such thing, we'll make the announcement as necessary.

All right. The rest of the questions are similar to the ones earlier. Can we take the question from the caller, Rochelle?