PETRONAS Gas Berhad (PETGAS) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to Petronas Gas Berhad Analyst Briefing for Quarter Ended 31st of March 2022. [Operator Instructions] I would now like to hand the call over to your first speaker today, is Izan Hajar Ishak. Thank you. Please go ahead.

Thank you, Desmond. Good morning, everyone. Thank you for joining our session today for Petronas Gas Berhad analyst briefing for quarter ended 31st March 2022. I am Izan from Investor Relations. I hope it's not too late to wish [Foreign Language]. I hope everyone managed to celebrate the festivity in the best way we can. With us from PGB, we have Abdul Aziz Othman, Managing Director and CEO; Shariza Sharis Mohammad Yusof, CFO; and Hisham Maaulot, Head of Business Development and Commercial. We will start the briefing with key highlights, business update, financial performance, to be followed by Q&A. For reference, our financial results is available at both Bursa Malaysia and PGB website. The presentation material is available at our website and also at the notified webcast platform. Without further ado, I'll hand over to Mr. Aziz for the highlights. Aziz?

Thank you, Izan. Salam walaikum, and good morning, everyone. So it's not too late for me to wish Selamat Hari Raya to us celebrating Hari Raya. We still have about 2 weeks of open houses, so please enjoy the food and stay safe. And thank you for joining us today. As always, let us start with the key highlights for the first quarter of 2022. Of course, I'm pleased to share with you that PGB has achieved a commendable performance backed by strong operations and steady revenue streams from our long-term contracts. Nevertheless, the cost of doing business is getting higher. The environment is getting tougher. On our part, within what we can control, we strive to improve our commercial terms with our customers, as well as further scrutinizing our costs to address these increases. As such, we think that our financial performance will remain resilient. Despite in the first quarter, being affected by several external factors, such as the fuel gas price, foreign exchange movement, obviously, with the deterioration of ringgit and of course, tax. If we remove these external factors from the equation, what you see is that our revenue and profit are consistent, steady on year-on-year basis. Despite all this, we managed to deliver an interim dividend of MYR 0.16 per share, which is the same as quarter 1 of 2021. Sustaining our operation has been our key crux. Nevertheless, we also -- as what we have announced last year, a few growth projects and happy to report that our growth projects are progressing as planned, with CapEx for projects sanctioned between 2021 and 2024, as mentioned to you before, close to MYR 1.4 billion. Now if I can move to the next slide, briefly to address the external environment. Again, as I mentioned, the cost of doing business is getting higher. The commodity price, especially for us, we pay for our field gas, at both at the GPP, GTR as well as utility. So the price has been volatile, somehow somewhat affected our IVC and the field gas costs. So resulting in higher operation costs, especially at our regulated business of GTR, as well as Utilities. This is one of the external factors that are not within our control. As you can see, there is a spike in the price of gas, owing to the spike in the oil price. What can we do, is to ensure that our operations run smoothly, with minimum interruption and of course, manage our costs effectively where we can control. Now if we can move to the financial snapshot comparing quarter 1 2022 with quarter 1 2021. Revenue stood at MYR 1.46 billion, higher than the same quarter last year, of course mainly contributed by the higher revenue from Utilities segment, of which, as all of you are aware, is pass-through from -- the fuel gas is passed through. So you have a higher fuel gas, than you get a higher revenue. And Utilities obviously not only benefited from that higher fuel gas price, but also higher electricity sales volume, including those under NEDA, which we have started to inject to the grid since August last year. The Group gross profit declined to MYR 612 million this year, again driven by higher operating costs, by Utilities segment, relating to the fuel gas costs for electricity supply. While we have passed through for an electricity, but for electricity, we cannot pass through to the customer. Profit after tax, obviously, was lower at MYR 438 million share, in tandem with the lower gross profit as well as lower share from joint venture and a higher effective tax rate, which we have listed in the previous session, there will be some impact from the Cukai Makmur, which was introduced for year 2022. EBITDA declined to MYR 823 million. Correspondingly, also lower by 8% in tandem with lower profits. Earnings per share, thereby because of that was lower by 21% as compared to Q1 2021, reflecting lower profit attributable to shareholders to the company. Dividend per share was MYR 0.16, which is actually similar to the same quarter last year. Of course, details on our financial performance will be presented by Sharis later in the session. Now if we can move to the business update. First, on gas processing, Page 9 of the slide. Despite all the external challenges, our operation at gas processing plants continue to operate at world-class level. OEE or overall equipment effectiveness remain within range for both C1 and C2. We achieved 99.9% for sales gas reliability, which obviously translating into delivery, excellent delivery, meeting the commitment to our customers. The high level of efficiency also resulted in MYR 29 million of performance incentives achieved in the quarter to a certain extent, negating the higher costs, as I mentioned previously. On updates related to the business, one of our operational initiative, is the off gas rerouting project. We process not only gas from offshore, but also the boil-off gas from the Terengganu. Crude Oil. Terminal or TCOT to add our gas processing RAPID complex. So this project, which was sanctioned last year is to capture the boil-off gas from TCOT, bringing it to our gas processing plant for PGB to process into useful products. This project will eliminate potential flaring of the gas at the Petronas owned Terengganu Terminal, benefiting from carbon emission, but at the same time, improve our overall process efficiency and higher gas yield at PGB gas processing plant. The higher efficiency, obviously should benefit PGB in addition to return -- adding to the return on CapEx, as per our gas processing agreement term. As mentioned, the total CapEx for these projects is approximately MYR 190 million, scheduled to complete in quarter 3, 2023. And upon completion, the expected profit contribution is around MYR 7 million per year. Moving on to Gas Transportation on Page 10. The pipeline network reliability for the quarter has been at close to 100%. We achieved average sales gas delivery of 2 million standard cubic feet per day, which actually is a 10% increase from the first quarter in 2021. Obviously, the demand has increased significantly, with the country moving out into endemic phase. Starting 1st January, 2022, PGU tariff is set at MYR 1.228 per gigajoule per day compared to MYR 1.229 per gigajoule previously, a minimal reduction. This is as per the IBR or the incentive-based regulation tariff adjustment, which is an annual process to account for additional revenue received in the previous year. So compared to the approved revenue set in the beginning of RP1. Now the new tariff is -- will be in effect, until 31st December, 2022, and we have published the same on our website for reference. On this segment update, we are on track for all projects under GT business. The big one is the lateral gas pipeline project to Pulau Indah, anticipated to complete by year-end or early quarter 1 next year. The Southern PGU debottleneck projects, which is -- should achieve the initial acceptance by middle of this year. And the new compressor station in Kluang, which we have sanctioned last year, late last year and is on track for completion in end 2023 or early 2024. Moving on to regasification, Page 11. Both Sungai Dang RGT and Pengerang RGT continue to sustain strong OEE performance, 100% during the quarter. Sungai Dang received one cargo, while RGT Pengerang received 7 cargoes, making it a total of 8 cargoes for the year. We also have branched out on ancillary services, especially the LNG truck loading service, which is doing well, serving our clients who are moving the gas throughout Peninsular Malaysia. In the -- as far as growth on the Regas segment, we have announced our -- an exercise to secure an expression of interest for a potential third storage tank at RGTP. Again, the evolution are ongoing. We will share further updates towards the end of the year, once we have better clarity on the viability of the projects. Utilities, if we can go on to Page 12. Overall, we continue to fulfill the customers' demand. Also, 100% product delivery reliability recorded across all products. Comparing quarter 1 2022 against quarter 1 2021, we have higher plant availability and higher customer offtake, obviously, because of the higher volume of electricity and steam delivered. Industrial gases was lower, because we have a customer shutdown during the quarter. Against quarter 4 2021, we saw lower sales volume for our products, again, in line with lower customer demand. We previously announced that we had concluded several contract renewals from -- with our long-term Utilities customers in 2021. We have since renewed 6 major -- more contracts earlier this year, which should come into effect by April -- this April. We look forward to finalizing several other long-term contracts renewal this year, which would mean that we will have a commitment to offtake the products for further extension, beyond the original 20-year contract that we have entered before. Now the renewed contracts are based on improved pricing structure. Previous contracts, the allocation between electricity and other products more skewed to electricity, whereas the new products, we have increased -- reduced the allocation for electricity, while increasing allocation to other products. The benefit of that is for other products, we can pass through, through the formula of -- with the customer. Thereby, the increase in gas price, you can pass through higher percentage through this new regimen, thereby mitigating better on the higher gas price that we are currently experiencing. And this will be better, to address the volatility of the fuel gas price. In 2021, also for the segment, we have reached a final investment to build a new plant in [indiscernible] plus connection to deliver Utilities, from our Utilities Kertih complex to customers' oxyalkylate plant, across the fence at our Utilities Kertih. The company with PCC OM, which is a new customer, the latest addition to our portfolio of customers residing in Kertih Integrated Petrochemical Complex. The project cost is close to MYR 50 million and is due to complete by third quarter of this year. The expected profit contribution for this project is between MYR 4 million to MYR 5 million per year. Let's move on to projects update. Again, our focus is on operational excellence. Costs, to make sure that we can navigate the higher costs better. But on the long term, we are also pursuing long-term sustainability through project delivery excellence and investment decision for new growth and sustenance projects. The projects as shown on the left side of the slide are progressing as planned. At the same time, as I mentioned, for the segment update, we are also in the midst of finalizing new investment decision, specifically several pipeline extension and new metering session along our PGU pipeline, to meet the supply that our shippers have committed with their customers. We will make announcement in due course, once some of these projects reaching final investment decision. Again, I mentioned about the potential third LNG storage tank at Pengerang, working towards project [ package ] before end of the year and power generation opportunities in Sabah. So that's all for our business updates. We shall now move to financial segment with Sharis. Over to you, Sharis. Thank you.

Thank you, Mr. Aziz. Good morning, everyone, and also Selamat Hari Raya to those celebrating. I am Sharis, and I will be taking you through the financials. So if you could please turn to Page 15. We will start with the segment performance for gas processing. In quarter 1, 2022, as mentioned by Mr. Aziz, the gas processing business continued to run as usual, with sustained revenues and also operating costs. Against the preceding quarter, quarter 4 2021, we saw revenue being comparable at MYR 434 million compared to MYR 433 million. Gross profit was also comparable at MYR 232 million against MYR 235 million. Looking at corresponding quarter, quarter 1, 2021, the revenue increased slightly by 1% as we enjoyed higher efficiency performance incentives under the gas processing agreement, due to the planned operations running very well. Segment results declined slightly by 5%, as we saw higher operating costs. Moving on to Gas Transportation on Page 16 or Slide 16. As mentioned also by Mr. Aziz, earlier this year, we made the announcement on the new PGU tariff, which will be effective on 1st January 2022. There is a minimal reduction of MYR 0.01 per gigajoule per day on the gas transportation tariff and hence, the adjustment will have very minimal impact. We're talking about just over MYR 1 million for the whole year of 2022. Comparing against the preceding quarter, quarter 4, 2021, the Gas Transportation segment registered slightly lower revenue by 2% at MYR 288 million. This is purely due to the lower number of days during the quarter. We charge DCs based on a daily basis. So if the calendar days are lower, then the revenue will be lower. Gross profit rose by 55%, to MYR 183 million, as we recorded lower operating costs. In quarter 4 of last year, there was a higher level of operations and maintenance activities, as well as also mentioned, some year-end adjustment in terms of the internal gas consumption. Moving on to against corresponding quarter, quarter 1 of 2021, segment revenue was comparable, while the results declined by 8%, as we registered higher operating costs, mainly the internal gas consumption costs. Again, this is to do with the pricing, obviously, similar to the Utilities business, as the gas price increased, the cost for the IGC also increased. Nevertheless, the IGC for GTR, for gas transportation as well, is a pass-through cost under the incentive-based regulation. Moving on to regasification on the next page or slide. Against the preceding quarter, quarter 4, 2021. Revenue declined by 3% to MYR 344 million. Again, this was due to the number of days in the quarter. Segment results was 4% lower at MYR 175 million, due to higher operational expenses. What happened was in the preceding quarter, we did see an adjustment or a revision on the contract for the electricity costs at the LNG 2. So this was a contractual adjustment in quarter 4. If you were to take away that adjustment, actually, the costs were about the same. Against the corresponding quarter, quarter 1 of last year, revenue was slightly lower by 1%. While the segment results declined by 11%, again due to higher operating costs. Similar to gas transportation, this is due to the higher IGC or internal gas consumption on the back of higher prices. We also recorded higher maintenance costs, but these were all in relation to our planned activities. Last but not least, to Utilities segment. Comparing the quarter against the preceding quarter, revenue was lower by 5% at MYR 392 million, as we saw lower industrial gases and steam sales. This is in line with the demand trending, as there was some maintenance being conducted at some of the customers' facilities. Gross profit declined by 60%. This was due to the higher fuel gas, which we are not able to pass through for our electricity sales. Again, as explained by Mr. Aziz, for electricity, the price is referenced or somewhat attached to the national tariffs. So the -- when the fuel gas cost increases, this cannot be passed through. In comparison for the other products in Utilities, the pricing formula allows for the higher fuel gas price to be pass-through. So against the corresponding quarter, quarter 1 of 2021, we saw higher revenue by 43%, mainly due to higher product prices, as well as higher contribution from electricity sales, following the commencement of electricity supply to the grid from August 2021. Segment results on the flip side declined by 71%, again, due to the narrower margins attributable to the higher fuel gas costs. So moving on to the Group, which is on page -- or Slide 19. Against the preceding quarter, quarter 4, we saw slightly lower revenue by 3%, mainly attributable to the Utilities regasification as well as the gas transportation segment, as explained. Gross profit was comparable at MYR 612 million. Profit for the quarter decreased by 10% as there was some unfavorable foreign exchange movements as well as a lower share of profit from joint venture companies. In addition, we also saw higher effective tax rate, with be imposition of Cukai Makmur or Prosperity Tax in 2022. Against the corresponding quarter, quarter 1 of last year, our revenue increased by 9%, with higher revenue from Utilities. Gross profit conversely decreased by 14%, again due to the narrowing margins from the Utility segment, nearly related to electricity. Profit for the quarter similarly declined by 19%, although it was mitigated by favorable foreign exchange movement, but it was -- we also did see the high effective tax rate impact relating to Cukai Makmur. Moving on to the balance sheet on Page 20. The Group's balance sheet remains robust. We're looking at close to MYR 19 billion in terms of total assets as at 31st March, 2022. Cash and cash equivalents stood at a very healthy MYR 3.7 billion. And in terms of the distribution of the segmental assets, this remained similar to our previous quarter on the right side of the page or slide. Now moving on to dividends. As you may be aware, the Board has approved a first interim dividend of MYR 0.16 per share, which amounts to MYR 316.6 million, which will be payable on 16th of June next month. The interim dividend reflects our Group's strong financial fundamentals, while also demonstrating our continued commitment to ensure the level of returns to our shareholders despite the external factors affecting PGB. With that, I'd like to end the financial section, and I will now pass the line over to Mr. Aziz, who will share on some company updates.

Thank you. Thank you, Sharis. Looking ahead for 2022, these are the key areas that PGB will -- in 2022. Of course, we will continue to focus on safe, reliable and efficient operations. But as all of us are aware, the regulatory period 1 is ending in 2022. So we have submitted our proposal to ST for the determination of the tariff as well as enhancement to some of the excess management to ST in March, and currently, we are in discussion with ST. So this will take a lot of our effort to come up with redeem that we believe should provide us more certainty in the margin from the regulated businesses. Of course, we continue to refocus progressing in the growth pursuit of initiatives that we have identified in Sabah. For the remaining part of the year, we -- when we reach investment decision, we will make the necessary announcement accordingly. Last but not least, as I've mentioned during AGM, as well as during the press briefing after the AGM, we are coming up with our sustainability blueprint, and work is in progress sometime in quarter 3 or quarter 4 this year, we will have -- we will present to our board for the sustainability blueprint for consideration, which become our guideline on the way forward in, as far as sustainability is concerned. So of course, we will share -- also share other -- any other relevant update accordingly as we progress throughout the year. So that's all for now, ladies and gentlemen, let's now move to question and answer. Thank you.

[Operator Instructions] First question comes from the line of Alex Goh from AmBank.

I have several questions. The first is regarding your internal gas consumption cost. In absolute value, how much was this above the -- what was in the RP1 structure? Then how much of that will be recurring over the next few quarters, and how much of that do you expect to be able to recover under the RP2 mechanism?

Alex, thank you for the question. As mentioned for the IGC or internal gas consumption, right, it is fully recoverable to the tariffs. What makes the difference sometimes is that, we have some 'savings' where we say use less IGC, right? The thing is for the quarter, what has happened is the price of the IGC has increased. So the savings, which is the difference between what is recovered via the tariff versus the actual cost has decreased if that makes sense, yes? So in total, the total cost is fully recovered. The question is how much more do we gain, in terms of efficiency or in terms of the price differential compared to the -- what is recovered through the tariff. So I think for this quarter, unfortunately, the gas price has moved a little bit unfavorably. So we were not able -- although we have achieved some savings from the volume side, it has been countered by the increment in the price.

Yes. But what would be your normalized profit? In other words, because you mentioned that the price cost has been offset by the savings. But what should be the normalized profit. I mean so you compare with fourth quarter and maybe in the third quarter last year, the profit has [indiscernible]. So what should we be looking in terms of the normalized profit and the additional cost, when can we expect that -- the recovery to come in?

The recovery is already happening, because whatever that is being recovered right now is sufficient. The only thing that is moving right now is the actual cost, because the price of the IGC is moving. So for example, if we -- moving forward, right, for the next few quarters, if the price continues to increase, then you will see a reduction in terms of the profit. But conversely, if it decreases, then we will see improvement in terms of the profit. But unfortunately, yes, the price factor is something that we are not able to control, which is why as part of the RP2 submission, that is one of the areas where we are discussing with ST on how best to address the variability, which is out of our control.

So we're trying to emulate other liberalized markets, where typically infrastructure owner doesn't carry price lease, whereas in Asia, the regime infrastructure owner carries the price risk. So the discussion is ongoing. And hopefully, we get a favorable decision by ST, where we will be judged on how efficient are we on volume, which reflect the efficiency of operation. While the shippers, who are actually the molecule owner, again, that's their business to take the risk on the molecule value price, or not, they carry that risk. So that is some of the package that we are currently discussing with ST for RP2. But what you see today is also the spike in the gas price. So you see impact is bigger. But normally, quarter-to-quarter, the movement of gas price is not as drastic, as what you've seen this quarter. But it worked both ways with the -- there's a big drop, then we will see a lot of benefit to the company, because the cost is much, much less than what has been approved under the tariff.

I see. But looking over into April, right, how do you see the prices? I mean, crude oil price continues to be elevated. Isn't that the current -- the continuing condition now?

Yes. But you see between quarter 1 and quarter 2, the movement is not as severe as what you've seen last year, right, suddenly from, I don't know, from a price of MYR 60 jumping to MYR 100. So you see quarter better quarter 1 to quarter 4, while you see what one of 2022 and quarter 1 of 2021 is a bit different, because the oil price in quarter 1 of 2021 was much, much lower. What we expect is between quarter 1 2022 and quarter 2 2022, the movement is not as severe as what we have seen previously. So it should not have a bigger variability, as what you see now.

I see. But looking back at the adjustment, the PGU tariff by [ MYR 0.001 ] to gigajoule. Can you just run through exactly why was that? I mean wasn't the higher cost of gas, should it have been imputed into that?

Hisham here. So the slight decrease in the tariff was resulting from a new shipper coming in, i.e., Shell, who took about 7 MMcf of capacity over there. So there was an additional revenue enjoyed by IGC, and that has to be adjusted accordingly, after we have gained the additional revenue. So it is not due to the increase of price, but it is merely because of the additional revenue that has been obtained by regas terminal, from another shipper that came in into the system.

I see. Okay. Right. So if we are to look into the second quarter and third quarter, would you say that the first quarter in terms of absolute profit, would that be reflective for the second and third quarter of this year -- in terms of the overall net profit?

As I mentioned, the -- we expect the IGC to remain similar to Q1. But for the Utilities, as I mentioned, the new contract will come onstream, whereby we can pass a higher percentage of the higher gas price to the customer. So we see better margin at Utilities compared to quarter one.

I see. But 4 of that, you did -- these contracts were revised in January and 2 in May. The one in January, did it reflect the higher gas costs and so...

It was signed in January, but the effective date end in 31st March. So you only see benefit from April onwards. We were very efficient Alex, we signed much early.

I see, okay. So we will see that...

We will move on to the next questions from Daniel Wong from Hong Leong.

Actually, I have 2 questions. Maybe highlight first question. On the MRP chart you showed us, MRP mix is the gas fuel costs, right? So just to want to check, right, we understand that your MRP is adjusted yearly basis. Is it -- I mean the input cost is adjusted -- is it in....

No. The MRP is monthly...

Revenue.

The MRP is a monthly number by Jabatan Statistic Malaysia.

Not by -- is it -- okay. Well, I understand in Petronas website, there is a historical MRP. In the first quarter this year, it was around 3.97%. Is that number we are looking at? So okay, we can use that as your cost basis, okay? And then what is the improved -- assumed MRP revenue -- input in revenue for your first quarter? Is it lower than this level or you are looking at higher than this level? I mean, for this quarter -- first quarter?

Yes. In terms of the MRP, as mentioned, it is actually published and available. So you can refer to it at the statistics, Department of Statistics website. And it gets published monthly. So in terms of...

There is the cost to you guys, right? But the revenue assumed for you guys for Petronas gas, is it -- is it -- how does it work? I mean, I understand, we assume a flattish -- assume MRP for your revenue, as if the actual cost of MRP is higher than you assume, that's why you have a margin deterioration?

Yes. There are 2 parts. It affects 2 segments First of all, for Utilities, right. For Utilities, it affects it. The MRP goes to the fuel gas costs, right? So the thing is when -- for all our products, whenever there is an increase or decrease on the fuel gas price because of the MRP movement, it gets passed through. The exception is for electricity.

I'm referring to the GPP and also RGT.

Okay. So the other segment -- yes, so the other segment is on the regulated business. Obviously, the IG -- internal gas consumption, the pricing of that internal gas consumption is also based on the MRP. So actually, in terms of volume, we are consistent with last year. The only reason the cost has increased is because of the market price.

Correct.

So as a result -- yes, as a result, that's why there is a decline in the profit.

Maybe I should rephrase, in your IGC, you guys have assumed a benchmark level for so-called reference level for your input costs?

In terms of the revenue.

What is the cost that you have, just under this revenue?

That is -- we are not able to share it, because that's something between...

Is it supposed to be -- for every quarter will be the same, or it will only be revised every half yearly or every year end?

It is based on the regulatory period. For example, RP1 is 3 years, so the level is determined based on that period.

It's fixed for the 3 years period?

Fixed for the 3 years. Again, as I mentioned just now, Daniel, we are trying to change that for RP2, because we are not in the business of making profit on the molecule. So hopefully, that discussion will bear fruit, then we will be [indiscernible] on how efficient are we running the system from a volume perspective, yes.

Okay. So next question is that if I follow up this question, in view that gas prices continue on the rising trend for the past few quarters, even LNG prices input or regional and worldwide is increasing. So it's quite logic to -- not to actually assume the gas price or IGC price cost to increase in the subsequent 2 quarters at this. That means your margin will continue to be affected in the upcoming quarters, but you guys can only recoup back this cost from 2023 onwards. Is it?

While that is true, but we are also taking action. As I mentioned, at Utilities, because of the old contract, the impact is bigger in quarter 1, but the new contract that we have, with ability to pass through the higher cost of gas more, leaving a portion only, that we can pass through because of the fixed electricity tariffs. So we, to a certain extent, that partially being mitigated, if you compare against quarter 1 and of course...

I understand that. Okay. My subsequent question is this, on your utility side, just now you mentioned that, your contract is the -- if your client, your customer, is it an all-inclusive contract, meaning that it's comprised of less electricity and gas combined together? Or is it independent of each other, independent, I mean, I am thinking about, single for electricity, single for steam, single for gas, how does it work?

It's -- the customer will take a typical -- our customer is petrochemical plants. So they took all those electricity. So there is one contract for its customers.

Okay. I mean the customer -- signed 3 contracts with you guys, it's a single customer electricity, steam and gas, so they will sign 3 contract with you?

Yes. Yes. They will sign an electricity and other products with us. One customer.

For one customer, they will sign this is 3 contract or 1 contract only? I mean this is...