When you charge your smartphone tonight, have you wondered where is the energy that feeds into your smartphone come from? If you are in Malaysia, most likely the energy source is coming from natural gas. Based on the statistics from Malaysia Energy Commission, natural gas is now the primary source of energy for the country. In 2014, 43.4% of the nation’s energy supply is coming from natural gas.
Interestingly, the gas supply industry in Malaysia is dominated by just two companies; Gas Malaysia Berhad (KLSE:GASMSIA) (GASMSIA 2.96 0.00 0.00%) and Petronas Gas Berhad (KLSE:PETGAS) (PETGAS 18.70 -0.02 -0.11%). Listed on Bursa Malaysia, Petronas Gas Bhd is the larger of the two, with a market capitalization of more than RM38.3 billion as at May 2017. It generated a revenue of RM4.56 billion in 2016 and a net profit of RM1.74 billion.
What makes Petronas Gas such a large company? It has also been a good investment for its long-term shareholders.
Its share price has more than doubled since a decade ago. However, is the company still a good investment now? What are the opportunities and risks lying ahead for the Petronas Gas Bhd?
Here are the top 7 things you need to know about the company before investing.
TICKER SYMBOL: KLSE:PETGAS / KLSE:6033
MARKET CAP: RM38.3 Billion (23 May 2017)
MARKET PRICE / SHARE: RM19.30 (23 May 2017)
Petronas Gas Bhd is active in four segments of business in the gas industry.
- Gas Processing
- Gas Transportation
The company has 6 gas processing plants in Malaysia with the capacity to process about 2,000mmscfd (Million standard cubic feet per day) of gas. The plants will take in natural gas from offshore platforms off Malaysia and process them into valuable gas products such as salesgas, ethane, propane and butane. These products are then transported to customers via the network of PETRONAS, its parent company. In 2016, this segment generated about RM 1.56 billion in revenue and RM 648.4 million in gross profit.
Petronas Gas has the largest gas pipeline network in Peninsular Malaysia, covering about 2,551 km. It also has a strong distribution network in Miri and Bintulu in East Malaysia. It then charged a transportation fee for customers to transfer gas across Malaysia. In 2016, this segment generated RM 1.3 billion in sales and RM 975.3 million in gross profit.
The company has plants that supply electricity and another type of utilities to customers. The four facilities are located in Kertih, Terengganu and Gebang, Pahang:
- Cogeneration plant
- Air separation unit
- Water plant
- Nitrogen generation unit
This segment generated RM1.07 billion in sales and RM 155.9 million in gross profit in 2016.
Lastly, Petronas Gas now has an offshore LNG Regasification Terminal in Melaka with the capacity of 530mmscfd. It is able to convert Liquidified Natural Gas (LNG) imported in by PETRONAS to salesgas and the end customers. This segment produced RM631 million in revenue in 2016 and RM286.3 million in gross profit.
New Projects In Pengerang, Johor
The RAPID project (Refinery and Petrochemical Integrated Development) in Johor is now one of the largest oil and gas development in Asia. Petronas Gas is participating in the development with two projects. One is a 490mmscfd LNG Regasification terminal. As per management, the project is already 75% completed. Based on what we observed from its regasification facility in Melaka, if the LNG Regasification Terminal in Johor is successful as well, it could potentially boost the revenue of the company by more than 10% once it is fully operational.
Another catalyst is its joint venture with Linde Malaysia to build an air separation unit in Pengerang. This plant could produce 41,000 Nm3/hr of Oxygen and 25,900NM3/hr of Nitrogen in capacity. This could also be another growth area for the company.
The RAPID project has gotten another key investor into the development, with Saudi Aramco buying a US$7 billion stake from PETRONAS. Moreover, according to news report, it seems the project is on track to come online in 2019. Thus, there is much optimism surrounding the project and the future of Pengerang.
Strong support from parent – Petronas
Petronas Gas Bhd is a 60.6% listed subsidiary of PETRONAS, the national oil and gas company. Most of its suppliers and customers are fed in by PETRONAS. This means that the company has very strong support from its parent and is a valid part of the entire value stream of PETRONAS. Moreover, it has a very strong balance sheet. And it has a business model that produces very high margin for the company and generate solid free cash flows for most years. In 2016, its net margin is about 38%
Slowdown in Oil and Gas
The current slowdown in the oil and gas sector is not a secret. Many firms in the region are facing bankruptcy issues. Even PETRONAS has been laying off thousands of jobs and cutting capital expenditure in recent years. If the slowdown continues for a long time, Petronas Gas might also suffer with the industry.
Increase competition from New Gas Supply (amendment) Act
Moreover, Malaysia recently passed The Gas Supply (Amendment) Bill in 2016. Traditionally, the gas industry in Malaysia is dominated by just two companies; Petronas Gas Bhd and Gas Malaysia Bhd. With the new Gas Supply Act, the government is looking to liberalize the industry to allow more new gas suppliers to come into the market. It is still unclear how the new landscape would change the business of Petronas Gas.
Many experts are commenting that the change would lead to a much lower gas prices in the country, which might directly impact the revenue of Petronas Gas. However, there are others who are more optimistic as Petronas Gas could end up with more customers using its assets for purposes such as Regasification and Transportation.
Although it is unclear how the changing regulation would affect the company, but it is certainly a key area for investors to keep an eye on going forward.
Petronas Gas Bhd is currently trading at around 22 times its earnings and offering a 3.1%. That is slightly lower than its 5-year average valuation of 24.1 times its earnings and a dividend yield of 2.3%.
Investor Relation Officer:
Harris bin Harun
(Head, Investor Relations)
Telephone : +603 2331 5260
MAJOR SHAREHOLDERS (17th Feb 2017)
- Petroliam Nasional Berhad (PETRONAS) – 60.66%
- Employees Provident Fund – 10.13%
- Kumpulan Wang Persaraan – 5.46%
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The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in Stanley Lim’s personal capacity and do not in any way represent those of his employer and other related entities. Stanley Lim does not own any companies mentioned.