PETRONAS Gas Berhad (PETGAS) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the PETRONAS Gas Berhad Q2 FY 2021 analyst briefing. [Operator Instructions] I would now like to hand the conference over to your speaker today, Ms. Izan Hajar Ishak. Please go ahead, ma'am.

Thank you, A.J. [Foreign Language] and good evening, everyone. Thank you for joining our session today for PETRONAS Gas Berhad analyst briefing for quarter ended 30th June 2021. I'm Izan from Investor Relations. Sorry, we had to start 15 minutes later from plan. With us from PGB, today, we have Che Abdul Aziz Othman, Managing Director and CEO; [indiscernible] Shariza Sharis Mohd Yusof, CFO; and in Hisham Maaulot, the new Head of Business Development and Commercial. Hisham is taking over from Abdul Razak Saim, who has retired effective quarter in 2021. We will start the session with highlight company's performance updates and to be followed by Q&A. For reference, our financial results is available at both Bursa Malaysia and the PGB website. The presentation material for today's session is also available at our website and [ our introduced ] webcast platform. Without further ado, I'll hand over to Che Aziz for the highlights. Aziz?

Thank you, Izan. [Foreign Language], and good evening, everyone. Thank you for joining us today. Again, I would like to apologize for a slight delay in our session. Start with the external environment. In the second quarter of 2021, we saw MCO 2.0 extended until May. But after that, as everybody is aware, there was a total lockdown, and the new national recovery plan were introduced in June. Nevertheless, despite the first of surge of COVID-19 cases in the country for Malaysia, the economic activities carried on businesses to continue to operate as reflected by the growth in Malaysia and GDP and industrial production index in Q2 2021. Now when you look at our operation, it continue uninterrupted. Of course, with our credit security to ensure the sustainability of energy security for the country. Our effort was to get our stock to be vaccinated early so that our operations can continue without interruption. So I'm happy to say that, at this moment, more than 90% of our staff has actually been vaccinated. And [Foreign Language] going forward, we should be able to carry our operation without interruption, God willing. We can go to the next slide, Izan. So as I mentioned, our business was operating as usual, despite the challenging environment, as highlighted. Operationally, our plants and facilities sustained high reliability across all our business segments, resulting in the Gas Processing business achieving a great target incentive. In May this year, we have new milestone, our third nitrogen generation unit, NGU project, which started in 2019 has finally reached its initial acceptance stage and ready for commercial operation. This project was initiated for 2 objectives, to provide additional nitrogen to serve a new customer within Kerteh and also to enhance the backup supply for both the new and existing customers. So, so far, we have early operation of the unit, and the early production of liquid nitrogen has taken place, and we should see new sales recorded for this in quarter 3, 2021. Commercially, PGB is supported by our long-term agreement with PETRONAS as other customers and new income from our ancillary services. And in April this year, we successfully recorded the first contractual electricity supplied to a new customer in Gebeng, Kaneka, [indiscernible] Pahang. They were one of our long-term customers in Gebeng, but for other utilities. So this is a result of the 20-year sales and purchase agreement for electricity that was signed in 2019. Yes. So as for growth, we are focused on exploring new opportunities, work on lateral gas pipeline to flow [indiscernible] continue. We are about to embark on construction around this month, and also work on debottlenecking the southern region pipeline are progressing as planned. This is despite the challenges of COVID as we are experiencing. Also, several discussions on potential opportunities are in progress, and we will announce accordingly in due time. Let's look at the financials. For the quarter ended 20th June 2021, PGB recorded bringing to MYR 1.38 billion in terms of revenue, slightly lower than the same quarter last year, but higher than quarter 1 this year. Group gross profit was lower at MYR 600 million on the back of higher operating costs. And profit after tax was also lower at is MYR 464 million, in line with the above mentioned lower gross profit, yes? Meanwhile, for half year performance, revenue was 3% lower at MYR 2.72 billion, mainly due to the lower product price for utilities products amid higher sales volume. Gross profit was nevertheless 2% higher at MYR 1.31 billion with Utilities segment recording significantly higher contribution as a result of higher margins and lower operating costs. Profit after tax similarly improved by 9% to reach 1 billion as the higher gross profit was complemented by the favorable foreign exchange movement. More details on the financials will be presented by Sharis after this. Let's move on to operational performance. Gas -- First Gas Processing. The operations at our Gas Processing plant continued to operate as usual, as I mentioned, despite the MCO announced across Malaysia and the increasing COVID cases in the country. The OEE or the overall equipment effectiveness remain within range for both C1 and C2. We achieved 99.9% of salesgas reliability, which demonstrates our commitment to the customers. The high level of efficiency also resulted in MYR 47.5 million of performance incentive achieved. And I think everybody is aware that the incentive consisted of performance base for the production of different products and [indiscernible] as well as the efficiency in the consumption of -- internal gas consumption. Next, the Gas Transportation and Regasification segments. Pipeline network reliability was sustained at close to 100%, and we delivered an average of close to 2 billion standard cubic feet per day of salesgas to customers. Regasification business, both the RGT Sungai Udang and Pengerang, each sustained 100% OEE level. And during the quarter, Sungai Udang received 2 cargoes, while RGT, Pengerang received 7 cargoes making it a total of 9 cargoes received to support our shippers' commitment to deliver to their customers. Utilities next. Overall, we continue to fulfill customers' demand, 100% PDR recorded across all products. During the quarter and the first 6 months of 2021, electricity uptake remained at a similar level. The Q2 volume includes the new delivery, as I mentioned just now, to Kaneka and would have been higher if not a low uptake from existing customers. Steam uptake has increased in line with the new delivery to Polyplastics beginning quarter 4 2020. Industrial gases, the higher uptake in quarter 2 2021 compared to quarter 2 2020 was mainly due to low uptake. The higher uptake in quarter 2 2021 was because lower offtake in last year's quarter, primarily due to customers -- [indiscernible] customers turnaround. Happy to note that in future, we have obtained our NEDA license to be able to inject any excess capacity of both our utility facility. We have started the export to the grid under the NEDA license on 20th August. And going forward for the remaining part of the year, we expect potentially higher electricity volumes sold to the customers because of this NEDA license that we have secured. That's all for operational performance. We will next move to financial segment. Over to you, Sharis. Thank you.

Thank you, Che Aziz. [Foreign Language], and a very good evening, everyone. Hope everyone is doing well. Sharis, here, and I'll be taking you through the financials. So if you could please turn to Page 14, we will start with the segmental performance of gas processing business. In quarter 2 2021, we saw the business continues to run as a updated by Che Aziz, despite the MCO announced by the government. Against the preceding quarter, quarter 1 2021, revenue was comparable at MYR 428 million, while gross profit was lower by 12% at MYR 213 million, mainly on higher operating costs. Against corresponding quarter, quarter 2 of last year, segment revenue was also comparable segment results was lower by 15%, again due to higher operating costs, mainly relating to depreciation. For results against the corresponding period, revenue was comparable at MYR 857 million, while segment results declined by 3% to MYR 456 million due to an higher operating costs and again, mainly on depreciation expenses. Moving on to Gas Transportation. Under the IBR or incentive-based regulation, the RP1 tariff for the PGU pipeline network remains unchanged for 2021. Comparing against the preceding quarter, quarter 1 of 2021, revenue was slightly higher by 1% at MYR 291 million. Gross profit was lower by 10% at MYR 179 million on higher operating costs during the quarter. This is mainly to do with maintenance costs and is in line with higher level of planned activities for the quarter. Against the corresponding quarter, quarter 2 of last year, segment revenue was comparable. Gross profit was lower by 14%, again, due to higher operating costs and similarly on higher planned maintenance costs. Against the corresponding period, revenue was level more or less level at $580 million, while segment results was 5% lower at MYR 376 million, similar reason as I mentioned before. Next, moving on to Regasification, the RP1 tariffs also remain unchanged until December 2022 for both RGTSU and RGTP. Against quarter 1 2021, revenue was steady at MYR 353 million. Segment results was 30% lower at MYR 138 million on higher operating costs, and this relates mainly due to internal gas consumption. Against corresponding quarter, we saw marginal growth in revenue with the introduction of new revenue streams from LNG reloading at Sungai Udang and truck loading at Pengerang. Gross profit was lower by 18% on higher operating costs, again, internal gas consumption. For the half year results against last year, both revenue and gross profit remained comparable at MYR 701 million and MYR 335 million, respectively, in line with the new revenue streams I mentioned previously. Last but not least, for Utilities. As you may be aware, the segment saw changes in terms of its fuel gas cost pricing from regulated price to reference market price effective 1st November 2020. On the sales end, the utilities product pricing allows for cost to be passed through with the exception of electricity. Therefore, when we see a decrease in fuel gas price, this would generally result in favorable margin impact and vice versa. So comparing against preceding quarter, quarter 1 2021, we saw revenue growing by 13% to MYR 312 million on higher product prices across our products. Segment gross profit was MYR 70 million, lower by 7%, in line with the higher fuel gas price and hence the cost during the quarter, while sales volumes were sustained. For results against last year quarter 2, revenue declined by 5%, attributable mainly to lower product prices, although we did see higher sales volume from new customers. Conversely, the segment gross profit surged by 40% as we had favorable margin impact on the back of lower fuel gas costs as well as a lower depreciation expenses. For the first half of 2021 compared to last year, similar trends to corresponding quarter, with revenue declining 11% to MYR 587 million on lower product prices amid high sales volume from new customers, while segment gross profit improved by 75% to reach MYR 145 million, again, on favorable margin impact. Next, on Page 18, which is the group level results. Firstly, for the preceding -- against preceding quarter, quarter 1, the group revenue stood at MYR 1.38 billion, higher by 3% due to revenue being higher from Utilities segment. Gross profit, however, declined by 16% to MYR 600 million as we saw higher operating costs across all segments as extent previously. Profit after tax was correspondingly lower by 14% at MYR 464 million on the back of the lower gross profit as well as the lower share of profit from our JV companies. This was offset by a favorable impact on foreign exchange movement. In terms of the share of profit, this declined mainly due to provisioning of tax at Kimanis Power Sendirian Berhad. And this provisioning of tax is a one-off, and it is a noncash item relating to deferred tax. Against the corresponding quarter, quarter 2 2020, we saw group revenue declining ever so slightly by 1%, mainly attributable to Utilities segment. Gross profit lower by 11%. Again, we saw higher operating costs across gas processing, gas transportation and regasification segments, although these were offset by the stronger contribution from Utilities. Profit after tax for the quarter was 19% lower in tandem with gross profit, coupled with unfavorable movement on foreign exchange and lower share of profit from 2 of the group's JVs, namely Kimanis Power, or KPSB, and Pengerang Gas Solutions Sendirian Berhad, PGSSB. KPSB was affected by unfavorable movement of foreign exchange similar to the PGB, while PGSSB recorded lower sales volume. Year-on-year, our group revenue declined slightly by 3% to MYR 2.72 billion on lower Utilities revenue, while gross profit improved slightly on stronger Utilities margins. Profit after tax grew 19%, in line with higher the gross profit as well as favorable ForEx. Moving on to balance sheet, which is on Page 19. Our balance sheet remains very robust with over MYR 18 billion in total assets as of 30 June 2021, whilst cash and cash equivalents stood at around MYR 3.5 billion. Also, the distribution of the segmental assets remain more or less similar as reported to the previous quarter. On to dividends on page 20. The Board has approved a second interim dividend of MYR 0.16 per share. amounting to MYR 316.6 million, which will be payable on 20th September 2021. This interim dividend demonstrates our commitment to ensure sustained level of returns to the shareholders despite the ongoing economic conditions. With that, we end the financial section. And I would like to pass the line over to Che Aziz to share a few things on company update. Thank you.

Thank you, Sharis. Moving on to updates on the next slide. So I think we continue with our growth pursuit as mentioned in the last session, we are focusing on 3 areas. One is on integrated Utilities solution, industrial parks and small COGEN solution. We are continuing our discussion with some of the potential buyers or users of the COGEN solution at the industrial park. Again, at appropriate time, we will make the announcement on this. We're also looking at potential IPP opportunities, as mentioned previously, in Sabah, especially for the expansion of our Kimanis Power plant as well as together with PETRONAS for a potential opportunity of integrated LNG to power regionally in Southeast Asia. We are continuing also on the strategies on potential step-up opportunity considering the current trend of energy transition. So study to determine whether there are potential areas that PGB should be looking at to position ourselves for the energy transition that is taking place today. So that is all we have today. Moving on to question and answer. Thank you.

Okay. Let's move on to question and answer. A.J.?

[Operator Instructions] We have the first question from the line of Ajay Mirchandani from JPMorgan.

Ajay here from JPMorgan. Two questions from me, given the limit. The first thing, if you could expand a little bit more specifically on the higher operating costs that you've seen Q-on-Q because this is pretty much across every single division, Regasification, Processing and Transportation. You have talked about maintenance costs, some amount of depreciation. But specifically, if you could help us get a little bit more color in terms of, number one, what exactly -- what exact cost components for each of the divisions? And second part of that should we expect this to recoup as we move into the third quarter? Or do you think these costs are sticky and will remain for the rest of the year? That's my first question. Second question that I had was specifically on your DPS. You've continued to pay a nice solid MYR 0.16 a quarter. Last year, you did pay a pretty large special. Can we expect that to potentially continue as we move into the end of this financial year as well? Those are my 2 questions.

Thank you for the question. First, I think I'll take the question on the dividend. I think we will try to maintain the dividend in the remaining quarters as per the current percentage. The dividend that we had last year was a one-off special dividend to capital restructuring that we had for 1 of our assets in the business. So going in the next 2 quarters, I think similar level of dividend is expected, yes, Ajay.

And if I can answer. And thanks, Ajay for the questions. And if I can take the first question, as you rightly pointed out, operating costs were higher across all 3 segments, actually with the exception of utilities. For the Gas Processing segment, it is mainly depreciation. There was a turnaround at GTP1, which is the first Gas Processing plant on the LPG unit that occurred earlier in the year. So the capitalization of those costs had led to the higher depreciation charge for quarter 2. So moving forward, we should be seeing those similar lines -- similar levels of OpEx, particularly the depreciation for Gas Processing. For Gas Transportation, as mentioned, it is mainly to do with maintenance. And actually, these are all planned maintenance. In that last year, obviously, we were limited somewhat by the MCO when the -- sort of the requirements were a lot stricter. So this year, we are seeing a more usual level of activities as far as maintenance is concerned for the Gas Transportation segment. So moving forward, barring any developments with regards to the MCO, we should be seeing similar levels for OpEx. And thirdly, for the Regasification segment, this is mainly to do with the internal gas consumption costs. For this quarter, there was an exceptionally high level required for operational needs. However, moving forward, we do expect this to be tapering off. So for Regas, from where we're sitting, that should kind of ease off for the next 6 months. Hope that answers your question.

We have our next question from the line of Alex Goh from AmBank.

I just want to go back to the earlier question on the dividend prospects, where it just indicated that you're planning to maintain dividend, how would you reconcile that reach your capital optimization strategy? And together with that question, could you give us some kind of idea on the potential investment CapEx that you're going to need to provide regarding your Kimanis Power expansion and together with the PETRONAS regional aspirations? That's my first question. My second question is also regarding the -- your maintenance cost. Could you quantify in terms of absolute amount? What was the overall maintenance costs for the group in the second quarter and first half of the year. And should we look at the run rate for the first half or the second quarter?

Thank you for the question. I'll take for the CapEx that you asked on the first question. I think, at this moment, it's still preliminary on some of those growth opportunities that we are working on. So at this moment, we cannot -- we do not have -- not the accurate estimate yet on the CapEx. But until those are actually more firm, again, when going forward on the dividend is -- we have been paying about 70% or so dividend pay out. So we expect to maintain that, first, when you have some of those growth projects becoming more real, and then we will do a -- you will look back at how we pay dividend. Sharis will take the second question.

Sure. Alex, and also to add on the dividend, I think first, the position remains the same. We still look at the level of dividends in terms of sustaining that. The capital restructuring exercise is still ongoing. But as you are aware, we are looking at several growth opportunities at the moment. So there is a need to balance between the 2. But again, we will consider any sort of like additional dividends and so on accordingly, it -- should that arise. But at the moment, the target is to sustain the level of dividends in terms of that [ MYR 0.72. ] Yes. Sorry, there was another question on maintenance costs. For the second quarter, there was a significantly higher or considerably higher maintenance operations and maintenance costs was around MYR 100 million to MYR 110 million within that range. And this compares to the preceding quarter, quarter 1, which is close to about MYR 80 million. So moving forward, the quarter 2 levels would be a better indicator as far as the planned activities are concerned at this point in time.

Okay. Could you also refresh us on what is your CapEx guidance for this year and next year? Is there any change?

No, there is no change as far as the CapEx levels are concerned. Again, the guidance that we have provided would really depend on the -- if you have any new projects being announced. But at the moment, we are looking at MYR 1.2 billion, MYR 1.3 billion for this year.

[Operator Instructions] We have a follow-up question from Ajay Mirchandani again.

Just to follow up specifically on the Transportation division. I just wanted to reconfirm, given the tariff reset, we should see the exact same tariffs into 2020 as well similar to 2021. Is that -- is my understanding correct?

Yes, that's correct. Yes. As of now, the tariff will be up to 2022. And then we will start our second regulatory period, which will run from 2023 for another 3 years from that...

When -- is there any review for that later as we move into 2022? Or has that already been set in stone in terms of what's the likely tariff reset starting January?

Yes. In every regulatory period, you will have a discussion with Suruhanjaya Tenaga. So currently, we are preparing for that discussion with Suruhanjaya Tenaga. And again, part of the requirement is that for us to submit our package for the new tariff redeemed by quarter 1 next year. So we are in the midst of preparing for that, yes.

I'll just read 1 question from the web. What is the status of the lateral product pipeline to pull out [indiscernible] and the CapEx and expected completion date for that?

Project is currently at about 7%. CapEx, as announced by us, is MYR 542 million, including the cost of land acquisition. The completion date remained initially accepted date March 2023. And yes, it will be part of the RP2 tariff, as mentioned just now, starting in 2023. The cost has been approved by ST to be part of RP2.

One more question. Is PETRONAS Gas involved in carbon capture and storage projects?

At this moment, as I mentioned, we are undertaking the study on energy transition. Carbon capture and storage is part of the [indiscernible] in the energy transition world. I don't know yet whether it will make sense for us to be in there, but the study is ongoing. But PETRONAS also is looking at carbon capture because when you want to do carbon capture, you need a peak underground storage, and most of our underground storage today actually at the offshore. So PETRONAS upstream is actually looking at it. And I know potentially for our carbon emission could be part for that to be reinjected into the initiatives that PETRONAS is doing.

For Regas segment, is the IGC cost being passed through or by the PETRONAS Gas?