PETRONAS Gas Berhad (PETGAS) Earnings Call Transcript & Summary

Okay, everyone. Thank you for joining today's session. Welcome to PETRONAS Gas Berhad's Analyst briefing for quarter ended 30th June 2024. We are organizing this session through the Microsoft Teams platform. Can someone respond to see if we are reaching you properly?

Yes, very clear.

Okay. Thank you. My name is Suri, Head of Investor Relations, PGB. And together with me from PGB, we have Encik Abdul Aziz Othman, Managing Director and CEO; Shahrul Azham Sukaiman, Chief Financial Officer; Encik Wan Khairul Nizam Wan Kassim, Head of Business Development and Commercial. The PETRONAS Gas Berhad's analyst briefing for quarter ended 30 June 2024 is divided into 4 segments. Firstly, Encik Aziz will present the key highlights for PETRONAS Gas Berhad for the quarter. Secondly, the business updates and financial performance will be shared by Encik Shahrul Azham. Next, Encik Aziz will return to share PGB's focus moving forward. And finally, we will open the session for Q&A. [Operator Instructions] The presentation was also shared with you prior to the session through this Microsoft Teams channel for your preference. [Operator Instructions]. For reference, our financial results is now available at both Bursa Malaysia and PGB websites. Without further ado, I will hand over to Encik Aziz for the key highlights.

Thank you, Suri. [Foreign Language] and good day, everyone. Thank you for joining us. I'm pleased to share with you our Q2 2024 performance results this morning. [Audio Gap] First, prolonged volatility of national ringgit against U.S. dollar. For the period under review, the Ringgit maintained an average of MYR 4.72 against U.S. dollar. Nevertheless, I think we all have read this in the current quarter, there have been some strengthening to the ringgit. Again, the strengthening of ringgit generally will have a positive impact to PGB's remaining dollar commitment. If you can recall, we have mitigated a majority of our forex exposure through the early settlement of the U.S. dollar lease liabilities of the floating storage units at our LNG regas terminal in Sungai Udang sometime in May last year. As for now, we do not foresee major impacts on our project execution, some of which actually has a higher exposure to U.S. dollar. Nevertheless, our team is keeping a close eye and always on a proactive lookout on these projects, and we have put mitigation strategies in place to be deployed if needed. Second, the potentially higher brand group volatility, forex, typically is impacted by geopolitics similar to crude. So we are also monitoring geopolitical risk, particularly in the Middle East. And that continues to hang over the oil market and increase in brand crude price as a result of these geopolitical issues has actually resulting in heightened risk premium. As you all know, Brent crude price will have an impact to PGB, particularly in the utilities business because Brent serves as a benchmark for our gas price based on the Malaysia reference price. Foreign exchange fluctuation and Brent price volatility have strong correlation that result in higher energy costs and variation in commodities prices. Both these factors combined affect the overall economic condition and obviously will keep the cost of doing business elevated. The average Malaysia reference price in quarter 2 was at MYR 44.12 per MMBtu. This is based on lagging factor. And because of that, for quarter 3, we'll see a potential decrease in the price, slightly below than the MYR 44 that I mentioned just now. And of course, we will continue to track the Brent price, which we expect to remain high. The other indicator is on the Service Producer Index, SPPI, which indicates the cost of doing business and from the graph that stays elevated in July 2024 at 115.7 points. And the cost of energy in Peninsular Malaysia continues to be significant as reflected by the ICPT surcharge. ICPT is overseen by Suruhanjaya Tenaga and was set for the next 6 months at MYR 0.16 per kilowatt hour, and this was effective from July 1, 2024. The ICPT adjustment by the government will impact our financial performance, particularly concerning the Utilities segment because we sell this on TNB tariff and including the ICPT. So any movement will impact either positive or negative, depending whether it is adjusted upward or downward. In light of the current external development explained earlier, we expect the business cost to remain high throughout the year, and we will keep a close watch on this condition and take necessary steps to mitigate their impact. In a nutshell, with all these data that we have shown you, our spread is better compared to last year. Now ladies and gentlemen, despite the challenges, I'm pleased to share that similar to quarter 1, PGB continued to deliver commendable results in quarter 2 and subsequently, consolidated into quarter 1 -- half of the year, we have successfully maintaining a sustainable dividend to our shareholders. Our achievement, again, is a result of our continued and consistent world-class operational excellence. If you look at later, Shahrul will show a lot of our operating parameters are close to 100% for all our business segments. On financial performance, revenue stood at MYR 3.2 billion, slight decrease of 1.4% of MYR 45.4 million, and this is mainly attributable to lower revenue from utilities segment in line with the lower product price amidst higher sales volume. This was offset by higher revenue from gas processing. As you know, the new GPA has come into place. So the reservation charge income slightly higher under the new term as well as higher revenue from cash transportation. As we have mentioned in quarter 1, we have this upward tariff revision from the cost that we incurred last year, which was transferred to this year. Nevertheless, the gross profit remained comparable at almost MYR 1.2 billion despite the lower revenue and this has cushioned -- it was cushioned by the lower operating costs within lower fuel gas as well as internal gas consumption expenses. Profit for the period rose by 20% or MYR 19 million, mainly driven by the reduction in the financing costs and lower exposure to foreign exchange movement. Again, that was because the early settlement of the USD lease liabilities for floating storage unit at the LNG redesignation terminal in Sungai Udang, Melaka, in the corresponding period. However, this was partially offset by lower contribution from the joint venture companies. EBITDA higher by 3.8% or about MYR 62.3 million at MYR 1.707 million, respectively, in tandem with the higher PBT. And because of that, our earnings per share increased by 1.8% reflecting higher profit attributable to shareholders of the company. Dividend per share for the quarter was approved at the board at MYR 0.16. This is the same to the corresponding period last year. And again, I would like to reiterate that this demonstrates the group commitment to ensure sustained level of returns to the shareholders. Ladies and gentlemen, now we come to the details of our business and financial performance. I would like to call Shahrul to provide the detail on this. Over to you, Shahrul.

Thank you, Encik Aziz. Good morning, everyone. I shall take you through the business and financial performance for quarter 2, 2024. As you're aware, a key component of our business is our operational excellence, where we maintain safety and reliability of our assets across 4 business segments as a priority. We keep our operational risk as low as reasonably practical and maintain our infrastructure reliability as our priority, which provides support to our revenue stability today. For the period, the gas processing plants maintained its world-class operational performance, recording close to 100% reliability. For segmented financial performance, for gas processing, against the preceding quarter, quarter 1, 2024, result was comparable at MYR 209 million due to higher revenue from IGC incentive and this was partly offset by higher operating costs due to higher level of maintenance activities. Against the corresponding quarter, quarter 2, 2023, segment results declined by 4.7% or MYR 10 million mainly due to higher level of maintenance activities carried out at the facility. Against the corresponding period, first half 2023, segment results declined by 2.5% or MYR 11 million, again, due to higher operating expenses, mainly depreciation and maintenance expenses following higher project completion during the period. Moving on to the next business segment, gas transportation. For the gas transportation business performance, the group's pipeline network achieved close to 100% reliability, similar to the corresponding period. In terms of financial performance, segment result was at MYR 156 million, lower against most preceding quarter and also corresponding quarter on the back of higher operating expenses, mainly from higher levels of maintenance activities performed during the quarter. Against the corresponding period first half segment of 2023, segment results rose by 10.6% or MYR 30 million due to higher revenue following upward tariff adjustment, mainly related to revision in internal gas consumption expenditure as allowed under the incentive-based regulation known as IBR framework by Suruhanjaya Tenaga. This increase is also coupled with lower operating expenses, mainly due to lower internal gas consumption. Moving on to the next segment, regasification business segment. The group LNG's gasification terminals in Sungai Udang, Melaka and Pengerang, Johor sustained their strong reliability performance close to 100% during the period. In terms of financial performance, again, the preceding quarter, quarter 1 2024, segment result was at MYR 158 million comparable against the previous quarter. Against the corresponding quarter, quarter 2 2023, segment result was lower by 5.3% or MYR 9 million due to higher operating expenses, mainly on depreciation as well as higher cost of floating storage units operating lease, against the corresponding period first half of 2023. Similarly, segment result was also lower by 3.7% or MYR 12 million due to the same reason at corresponding quarter. So as you can see, our gas processing, gas transportation and regasification segments remain a reliable business for us with a steady bottom line. Our priority for this segregated businesses is the operational excellence to ensure high level of capacity available and product delivery remain reliable. These 3 segments combined contributes about close to 90% of our bottom line this year. Moving on to Utilities segment. For Utilities segment throughout the period, Utilities plant achieved 100% product delivery reliability for electricity while close to 100% for steam and industrial gases. In terms of the sales volume, for electricity and steam, the product sales volume was lower due to unplanned shutdown by customers. However, there's also higher volume exported to TNB recorded during the quarter due to attractive SMP or System Marginal Price. For Industrial Gases, higher product sales volume was recorded due to higher consumption from customers. For financial performance for Utilities business, against the preceding quarter, quarter 1, 2024, segment result was at MYR 75 million, which is comparable against the preceding quarter. Against the corresponding quarter, quarter 2 2023, segment results declined by 26.3% or MYR 27 million, mainly due to lower revenue attributable to lower product prices in tandem with lower fuel gas price, coupled with downward revision of ICPT surcharge. Additionally, operating expenses was also higher from depreciation and maintenance expenses, and this was partly negative by a favorable impact of lower fuel gas costs. Against the corresponding period first half of 2023, when results declined by 5.2% or MYR 8 million due to lower revenue following lower product prices in tandem with lower fuel gas price, coupled with downward revision of ICPT surcharge. This was negated by lower operating expenses, mainly from the favorable impact of lower fuel gas costs following downward movement of fuel gas price based on MRP. Moving on to the updates on projects. While we focus on operational excellence of the group's existing assets, we also continue to pursue growth to ensure sustainable revenue and expand our asset base. We have made several significant announcements of all projects which have reached final investment decisions in the past year and now in the execution phase for these projects and we strive to ensure flawless delivery of this project in terms of safety, timely execution and within budget and also quality. These projects are progressing within schedule. That Kluang Compressor station project, which is expected to complete by end of this year, will allow more gas volume to the Southern region. The LNG storage in Pengerang, which will add 31% to our existing LNG storage capacity is expected to complete by mid-2025. Another project in Pengerang, which is the Cold Energy ASU along with Sipitang Power Plant and Jeram Compressor Station are expected to complete by end of 2026. Right. Moving on to the group's financial performance. As mentioned earlier, the group sustained its commendable performance across all its plants and facilities. Against the preceding quarter, quarter 1 2024, the group revenue was at MYR 1.65 billion, increased by 2%, mainly contributed by higher revenue from Utilities segment driven by highest steam volume and price in line with higher fuel gas movement. Despite higher revenue, gross profit was marginally lower by 1% due to higher fuel gas costs in Utilities segment following upwards movement in fuel gas price during the quarter. The average fuel gas price was higher by about 6%. However, profit for the quarter grew by 4%, mainly contributed by higher share of profit from joint venture companies. So better performance from joint venture companies mainly due to favorable impact from realized forex gain, in particular from our Kimanis Power plant in Sabah. Kimanis power plant actually entered into forward exchange contract to mitigate the foreign exposure for the supply of pipe and repair services for their gas turbines. So there are some favorable impacts from the JV companies. Against corresponding quarter, quarter 2 2023, group's revenue increase slightly with higher revenue from gas processing, following higher reservation charges under the new term and higher revenue from and higher revenue from Gas Transportation due to upward tariff adjustment. This was partially offset by lower revenue from Utilities segment in line with lower product prices. Gross profit, nevertheless, decreased by 8% or MYR 55 million on the back of higher operating expenses, mainly from depreciation expense and maintenance costs following higher completion of projects and activities performed, coupled with inflationary impact. Profit for the quarter was correspondingly lower by MYR 5 million.in line with lower gross profit, which was cushioned by lower impact of unfavorable foreign exchange movement. Comparing against corresponding year-to-date, first half last year, group revenue stood at MYR 3.3 billion, a slight decrease of 1%, mainly attributable to lower revenue from utility segment because of the lower product prices. This was partially negated by higher revenue from Gas Processing from higher reservation charges under the new term as mentioned by Encik Aziz earlier, as well as higher revenue from gas transportation due to upward tariff adjustment. Despite the lower revenue, gross profit was comparable due to lower operating costs on the back of lower fuel gas and internal gas consumption expenses in tandem with lower fuel gas price. Profit for the period at MYR 963 million was higher by 2%, mainly driven by a reduction in financing costs and lower exposure to foreign exchange movement following early settlement of dollar lease liabilities for floating storage units at Sungai Udang, Melaka, in the corresponding period, and this was partially offset by lower contribution from joint venture companies. Moving on to the balance sheet. As at 30th June 2024, the group's total asset was at MYR 18.2 billion, lower by 5.8%, mainly due to lower cash as a result of good repayment of Islamic financing facility made during the period amounting to MYR 1.2 billion. Correspondingly, total liabilities also decreased by about the same MYR 1.2 billion as a result of the said transaction. Despite the reciting cash and cash equivalent to MYR 2.5 billion during the quarter, the cash balance remained healthy with some headroom to play with for our existing and upcoming growth projects. As for dividend, the Board has approved the second interim dividend of MYR 0.16 per share payable on 19th September, 2024, and this demonstrates our commitment to ensure a certain level of returns to shareholders. That is all for me. I will now pass the line over to Encik Aziz to share on the company outlook.

Thank you, Shahrul. Ladies and gentlemen, again, our results demonstrate our continued delivery of operational excellence. God willing, we are poised to continue with the commendable performance throughout the remainder of 2024. And again, our focus remains steadfast along the 4 lenses of our sustainability blueprint. As you are all aware, there are 4 lens. First, talking about the sustainable value creation lens, we remain committed to ensure safe, reliable and efficient world-class operations. This is important because of our business model. Safe, reliable and efficient operation is to sustain our profit and value to shareholders. While we endeavor to ensure flawless project delivery in terms of safe and timely execution within budget and quality, we also have made strides in our growth and value creation pursuits. Amongst the projects that I would like to highlight, the new 100-megawatt power plant in Sabah. We are in the midst of finalizing our proposal and discussion with Energy Commission of Sabah. [Foreign Language] soon, we'll get some alignment to move ahead on this project. Then for the power plant in Patau-Patau, Labuan, as you're all aware, we received the letter of intent sometime early this year and we are working hard towards FID, which soon we are going to start discussion with the Suruhanjaya Tenaga. And hope that we will have alignment with Suruhanjaya Tenaga before year end to enable us to continue with the project. Second, in the lens of safeguarding the environment, we continued with our CO2 abatement initiative. Mostly at this moment, it's through operational control. We explore fuel switching electrification and, of course, the CO2 that we emit, we're also looking at monetizing the CO2 molecule. And these efforts actually have managed to limit our GHG emission within expectations and long roadmap the we put forward for our NZCE2050 targets. The other aspect of safeguarding the environment is on our 4R program deliverables. And again, this is depending on the scheduled maintenance activities and the waste generated and most of it is during the turnaround. In the first half of 2024, we achieved 60% of our numbers against 61% target. I'm glad to say that today, we have surpassed the target and we are now at 63% recovery of the total waste generated. The two other angles or lenses that we are focusing on is positive social impact and responsible governance. We have contributed towards creating a positive social impact. During this period, we are focusing on the social impact management program, powering knowledge for education for children in the area that we operate, and of course, also in the area we operate uplifting life of the community surrounding our operational area. And last but not least, we're also moving ahead with the Planting for Tomorrow in regard to the environment and of the positive social impact. In the lens of responsible governance, our controls on governance-related metals remain effective. And again, we strive to continuously enhance of our internal governance practices, policies and procedures to ensure our relevant stakeholders and the markets. To that end, we had successfully conducted a Board Audit Committee and Board Sustainability and Risk Committee training. Focus is about uplifting the Board members' knowledge, mainly on ESG-related reporting updates, institutional investors' expectation on ESG and a bit on what is the development on the human rights moving forward. We will continue to stay abreast on sustainability methods and progress development and we'll continue not only to upgrade the knowledge of the management, but also at the Board level. With that, thank you. And now we shall move to question and answer. Over to you, Suri.

[Operator Instructions].

Hello morning, everyone. Daniel here from Hong Leong. Okay. I've 2 questions here. Maybe I'll start off with the first question. On the maintenance activities, are we expecting a similar level of maintenance activities for the second half? Or are we expecting higher maintenance in the second half of the year for the group. Secondly, on the Utilities segment, we know that the ICPT surcharge has dropped by MYR 0.01 to MYR 0.16 now -- in the second half of the year. And then we do -- we also see that MRP price has dropped by about 5% in the third quarter itself. So based on these changes in this MRP and the surcharge, are we looking at improved margin for the Utilities segment in the -- at least in the third quarter itself? And third question is on the regasification. For the first half of Q4, what is the breakdown between the Pengerang and Suagi Udang in terms of gross profit?

Thank you, Daniel. First your question on maintenance activities and potentially costs in the next 6 months. I think as you have seen the trend of the past years, typically, the second half, the numbers, not only activities, but also the cost -- the money we spend will be higher than in the first half. That's normal because the first half is more about us focusing internally on the contract side and what not and the activities come in the second half. So you will expect to see more maintenance activities as well as higher cost to be spent accordingly. The second question, in regards to margins of utilities. We -- of course, the ICPT, we expect to see some impact to our Utilities business. As you are aware, it's MYR 0.01 of ICPT. So it's not going to be significant, but there will be some impact to it. The MRP, I mean, it will have a mixed impact. I mean the higher the MRP, it will impact negatively on the electricity. But on the other products, it will provide a better margin for us because it's passed through with some margin in it. All in all, it will have some impact, but typically, it's not that significant to us. So that's the answer on ICPT and MRP. On the regas profit breakdown, I'd like to ask Shahrul to provide some answers to that.

In terms of the breakdown of the margin between the two regasification terminals, I think I said year-to-date, June, I think this breakdown of the margin is pretty much around 60% to our investigation terminals in Pengerang and 40% for our regasification in Sungai Udang, Melaka. Okay, Daniel?

Sorry. Again the 60% is to Sungai Udang. Is it?

No. Pengerang.

60% Pengerang and 40% is to Sungai Udang. How does this compare with the first half of last year? Is it almost the same or are we looking at increasing activities in Pengerang over the years?

I think, firstly, we need to understand that how these two terminals being compensated is not by how much is the utilization, but it's by way of -- is being available to be used by our shippers. So in this case, last year and this year, it remained the same. It remain reliable and available for the shippers to implement the facilities. So in terms of the breakdown, I think it's comparable given the revenue and also cost structure for these two assets.

Just to give you a guidance, Daniel. That will be different year-on-year depending on the price of gas that we use for our -- to run the operation. But as you're aware, this is a pass-through item. So if last year, we pay higher than what has been approved, we can recover it this year. So -- but typically, as Shahrul mentioned, it's a capacity payment business. As long as we make the capacity available, you would expect to see a similar number along this RP2 period.

Daniel. I'd like to open the line to Anshool next, I think.

Maybe I'll start with a few questions. So to start with, earlier last week, we had PETRONAS Chemical highlighting that they had deferred some utility payments related to PIC. So I just wanted to confirm if these payments are related to the services PETRONAS Gas provides at Pengerang or is this -- you do not have any relation to that? My second question is related to PETROS. I believe you recently had the third gas agreement with the PETRONAS for gas purchasing. Given now PETROS is the gas aggregator for the gas from Sarawak, do you have to have another agreement for gas processing with PETROS. Is that something you have to consider? My third question is related to the associate income. We saw it pick up again and you highlighted that is related to some forward contracts by Kimanis? Is that all or was there an improvement in operational performance and operational profitability? And is there a guidance moving forward?