Is Petronas Gas an investment opportunity?

Value Investing Case Study 95-1. Can Steady Infrastructure Beat Volatile Markets? Petronas Gas Reviewed.

Petronas Gas Berhad (PETGAS) is a key player in Malaysia’s gas infrastructure sector. It operates across four core segments: Gas Processing, Gas Transportation, Regasification, and Utilities. 

With over a decade of consistent operational performance, the company has maintained a strong financial position backed by long-term contracts, regulated returns, and disciplined capital management. 

While recent years have seen a decline in margins due to rising input costs and regulatory constraints, PETGAS continues to generate stable cash flows and remains a dependable dividend payer.

Summary of Key Points

• Consistent revenue growth: 10-year CAGR of 4.4%, with steady contributions from core segments.

• Margin normalization: Post-2021 margins declined due to higher fuel gas costs and tariff caps but have since stabilized.

• Strong financials: Low debt, RM 2.6 billion in cash, and strong free cash flow conversion.

• Above-Average Returns: ROIC and ROE average 15%, exceeding the cost of capital.

• Peer Outperformance: PETGAS ranks above average globally on EBIT margin, ROIC, and free cash flow metrics.

Should you go and still buy it? Well, read my Disclaimer. 

Contents

• Company background

• Operating performance

• Financial position

• Valuation

• Conclusion

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Company background

Over the past decade, PETGAS has remained focused on its core business segments of:

• Gas Processing - Processes raw natural gas from offshore fields into salesgas, ethane, propane, and butane for downstream use.

• Gas Transportation -Transports processed gas products via the Peninsular Gas Utilisation (PGU) pipeline network to end-customers across Malaysia.

• Regasification - Receives, stores, and converts imported liquefied natural gas (LNG) back into salesgas at terminals in Sungai Udang and Pengerang.

• Utilities - Produces and supplies electricity, steam, industrial gases, and other utility services to petrochemical facilities and third parties in Kertih and Gebeng.

While the Group has not diversified into unrelated industries or shifted away from its infrastructure-centric role in the gas value chain, there were changes in the way these core businesses were managed and enhanced:

• Greater integration and interoperability across the value chain.

• Adoption of digital technologies and automation for operational efficiency.

• Stronger emphasis on sustainability, stakeholder engagement, and governance.

• Investment in expansion projects (e.g., floating LNG storage, new regasification capacity).

This is a Malaysian operation with the Gas Processing and Utilities segments being the 2 bigger revenue contributors. Refer to Chart 1.

Chart 1: Revenue by Segment

Operating performance

Over the past decade, the Group’s revenue grew at 4.4 % CAGR. As can be seen from the left part of Chart 2, this growth was quite consistent – apart from 2019, there was growth every year from 2015 to 2024.

“As of 1 January 2019, our Gas Transportation and Regasification businesses were subjected to the Incentive-Based Regulation (IBR) Pilot Regulatory Period…while faced with lower tariffs, which led to lower revenue for the Group…” 2019 Annual Report

While there was revenue growth, especially post-2021, gross profit margins declined from an average of 48 % for 2015/16 to an average of 37 % for 2023/24. These led to corresponding profits declined. 

• 2022: Profit declined due to higher fuel gas costs, forex losses, and reduced contributions from joint ventures despite higher revenue.

• 2023: Profit was impacted by increased depreciation from new assets and lower regulated tariffs in the regasification segment.

• 2024: Profit softened slightly amid global market volatility, rising maintenance costs, and continued depreciation pressure.

You should not be surprise to see the returns following the profit pattern. Refer to the right part of Chart 2.

Over the past decade, the Group achieved an average ROIC and ROE of 15 % each. These were significantly higher than the current cost of funds of 7 %, suggesting that shareholders’ value was created.

Chart 2: Performance Index and Return

Chart 3 showed that the margin and contribution picture post-2021 were lower than those pre-2020. I suspect that the Group may experience sustained lower gross profit margins post-2021 due to the following:

• Higher fuel gas costs. The Group cannot fully pass on these costs, particularly in the Utilities segment.

• Incentive-based regulation limits pricing flexibility and dampens margin recovery even as costs rise.

• Weak utilities segment that is exposed to volatility in fuel and energy input prices.

• Increased sustainability investments pressure margins in the short to medium term.

• Flat operating profit despite revenue growth indicates structural cost pressures have eroded profitability.

• Revised gas processing agreement (2023) suggests a lower-margin baseline has been accepted contractually.

These factors collectively suggest a “new normal” of thinner margins unless significant structural changes occur. 

Chart 3: Margins and Operating Profit

Note to Op Profit. I broke down the operating profits into fixed costs and variable costs.

• Fixed cost = SGA, Depreciation & Amortization and Others.
• Variable cost = Cost of Sales that excluded Depreciation & Amortization.
• Contribution = Revenue – Variable Cost.
• Contribution margin = Contribution/Revenue.

Peer comparison

To compare PETGAS' performance, I looked at the following global listed peers with similar business models in midstream natural gas infrastructure and gas-related utilities. 

• Enagás S.A (ENG) A Spanish gas infrastructure company that owns and operates the national gas transmission network and LNG regasification terminals under a regulated asset base model.

• GAIL (India) Ltd. (GAIL) India’s largest state-owned natural gas company engaged in gas transmission, processing, distribution, LPG production, and petrochemicals.

• Snam S.p.A (SRG), Italy’s leading gas utility, specializes in regulated natural gas transmission, storage, and regasification infrastructure across Europe.

• TC Energy Corporation (TRP) A Canadian energy infrastructure company focused on natural gas pipelines, power generation, and energy storage across North America, operating under long-term contracts and regulation.

• The Williams Companies, Inc. (WMB) is a US midstream energy company that provides natural gas gathering, processing, and interstate transportation services, primarily through its extensive pipeline network.

You can see from Table 1 that PETGAS is a small player based on the 2024 revenue. But it had one of the better revenue growth rates. 

Table 1: Peer revenue

I compared its performance based on 4 metrics as shown in Charts 4 and 5. Overall, PETGAS’s performance was above average compared to its global peers.

• I would rate PETGAS’s return on capital as one of the best. While there were some years that it ranked No. 2, its return was less volatile.

• Its EBIT margin and unlevered free cash flow margin are above the peer average.

• It ranked No. 2 in terms of the EBIT margin.

• It had a relatively steady EPS, and I would rank its EPS performance as about average. 

Chart 4: Peer Return on Capital and EBIT Margin

Chart 5: Peer Levered Free Cash Flow Margin and EPS

PETGAS peer performance points to it being a disciplined and financially sound infrastructure player. Its low leverage and stable regulated earnings provide defensive strength, particularly in volatile markets. 

However, PETGAS remains a relatively small, single-market operator with modest EPS growth and limited geographic diversification. While expansion in regasification and digital efficiency offer growth potential, sustained margin pressure from rising input costs and regulatory caps could limit upside. 

Case Notes When investing in a cyclical company like PETGAS, it is important to recognize that while it has some defensive characteristics (due to regulated returns and long-term contracts), parts of its business are still exposed to economic and energy market cycles. Here are some issues to look out for:  Track operating leverage in weak cycles. In cyclical downturns, fixed-cost-heavy models suffer margin compression when volume drops. Evaluate regulatory and policy risks. PETGAS operates under incentive-based regulation - understand how returns are calculated and what inputs are subject to change. Cash flow and Balance Sheet resilience. In cyclical downturns, strong operating cash flow and a healthy balance sheet are crucial to sustain dividends and fund capex. Capital allocation discipline. In cyclical industries, poorly timed investments can destroy value. As you can see, there are many issues to consider when carrying out a fundamental analysis of companies in this sector. This requires expertise and time.  Visualizing a company’s business performance and investment risk (by comparing market price with intrinsic value) is one way to shortcut the process. The Fundamental Mapper helps investors make informed decisions as it provides such insights in an easy-to-see format. You can see the position of PETGAS as of 6 May 2025 in the Fundamental Mapper chart below. Download the Fundamental Mapper app now on Xifu to get investment insights into Bursa Malaysia companies   PS: Generally, you should dig deeper before investing in companies that fall into the Gem quadrant. The Fundamental Mapper reflects business performance based on the past six years of results. Your analysis should assess whether the company's future performance is likely to improve compared to its historical track record. If you can establish a credible case for better future performance, then you could postulate that the market price has not reflected these prospects.

Case Notes

When investing in a cyclical company like PETGAS, it is important to recognize that while it has some defensive characteristics (due to regulated returns and long-term contracts), parts of its business are still exposed to economic and energy market cycles. Here are some issues to look out for: 

• Track operating leverage in weak cycles. In cyclical downturns, fixed-cost-heavy models suffer margin compression when volume drops.

• Evaluate regulatory and policy risks. PETGAS operates under incentive-based regulation - understand how returns are calculated and what inputs are subject to change.

• Cash flow and Balance Sheet resilience. In cyclical downturns, strong operating cash flow and a healthy balance sheet are crucial to sustain dividends and fund capex.

• Capital allocation discipline. In cyclical industries, poorly timed investments can destroy value.

As you can see, there are many issues to consider when carrying out a fundamental analysis of companies in this sector. This requires expertise and time. 

Visualizing a company’s business performance and investment risk (by comparing market price with intrinsic value) is one way to shortcut the process. The Fundamental Mapper helps investors make informed decisions as it provides such insights in an easy-to-see format.

You can see the position of PETGAS as of 6 May 2025 in the Fundamental Mapper chart below.

Download the Fundamental Mapper app now on Xifu to get investment insights into Bursa Malaysia companies

 

PS: Generally, you should dig deeper before investing in companies that fall into the Gem quadrant. The Fundamental Mapper reflects business performance based on the past six years of results.

Your analysis should assess whether the company's future performance is likely to improve compared to its historical track record. If you can establish a credible case for better future performance, then you could postulate that the market price has not reflected these prospects.

Case Notes

When investing in a cyclical company like PETGAS, it is important to recognize that while it has some defensive characteristics (due to regulated returns and long-term contracts), parts of its business are still exposed to economic and energy market cycles. Here are some issues to look out for: 

• Track operating leverage in weak cycles. In cyclical downturns, fixed-cost-heavy models suffer margin compression when volume drops.

• Evaluate regulatory and policy risks. PETGAS operates under incentive-based regulation - understand how returns are calculated and what inputs are subject to change.

• Cash flow and Balance Sheet resilience. In cyclical downturns, strong operating cash flow and a healthy balance sheet are crucial to sustain dividends and fund capex.

• Capital allocation discipline. In cyclical industries, poorly timed investments can destroy value.

As you can see, there are many issues to consider when carrying out a fundamental analysis of companies in this sector. This requires expertise and time. 

Visualizing a company’s business performance and investment risk (by comparing market price with intrinsic value) is one way to shortcut the process. The Fundamental Mapper helps investors make informed decisions as it provides such insights in an easy-to-see format.

You can see the position of PETGAS as of 6 May 2025 in the Fundamental Mapper chart below.

Download the Fundamental Mapper app now on Xifu to get investment insights into Bursa Malaysia companies

 

PS: Generally, you should dig deeper before investing in companies that fall into the Gem quadrant. The Fundamental Mapper reflects business performance based on the past six years of results.

Your analysis should assess whether the company's future performance is likely to improve compared to its historical track record. If you can establish a credible case for better future performance, then you could postulate that the market price has not reflected these prospects.

Case Notes

When investing in a cyclical company like PETGAS, it is important to recognize that while it has some defensive characteristics (due to regulated returns and long-term contracts), parts of its business are still exposed to economic and energy market cycles. Here are some issues to look out for: 

• Track operating leverage in weak cycles. In cyclical downturns, fixed-cost-heavy models suffer margin compression when volume drops.

• Evaluate regulatory and policy risks. PETGAS operates under incentive-based regulation - understand how returns are calculated and what inputs are subject to change.

• Cash flow and Balance Sheet resilience. In cyclical downturns, strong operating cash flow and a healthy balance sheet are crucial to sustain dividends and fund capex.

• Capital allocation discipline. In cyclical industries, poorly timed investments can destroy value.

As you can see, there are many issues to consider when carrying out a fundamental analysis of companies in this sector. This requires expertise and time. 

Visualizing a company’s business performance and investment risk (by comparing market price with intrinsic value) is one way to shortcut the process. The Fundamental Mapper helps investors make informed decisions as it provides such insights in an easy-to-see format.

You can see the position of PETGAS as of 6 May 2025 in the Fundamental Mapper chart below.

Download the Fundamental Mapper app now on Xifu to get investment insights into Bursa Malaysia companies

 

PS: Generally, you should dig deeper before investing in companies that fall into the Gem quadrant. The Fundamental Mapper reflects business performance based on the past six years of results.

Your analysis should assess whether the company's future performance is likely to improve compared to its historical track record. If you can establish a credible case for better future performance, then you could postulate that the market price has not reflected these prospects.

Financial position

I would consider the Group as financially strong. It is a cash cow.

As of Dec 2024, it had RM 2.6 billion in cash. This is equal to 14 % of its total assets. 

As of Dec 2024, it had a debt-equity ratio of 13 %. This has come down slightly from its 2019 high of 29 %.

Over the past decade, it had an average 12 % Reinvestment rate (Reinvestment/NOPAT). This meant that a big part of the NOPAT could be returned to shareholders.

Reinvestment = CAPEX & Acquisition – Depreciation & Amortization + increase in Net Working Capital.

Over the past decade, it generated positive cash flow from operations every year. During this period, it generated RM 31 billion in cash flow from operations compared to the total PAT of RM 19 billion. This is a good cash flow conversion ratio.

It had a good capital allocation plan. Refer to Table 2. The cash flow from operations was sufficient to fund its CAPEX. You can see that it is a cash cow, generating more than it needs to grow the business. 

Table 2: Sources and Uses of Funds 2015 to 2024

Valuation

My analysis showed that PETGAS is a mature company with a low revenue growth rate. While the post-2021 margins were lower than those in the prior years, they seemed to have stabilized. I thus based my valuation on the single-stage Free Cash Flow to the Firm model with the following assumptions. 

• The base revenue would be the 2024 revenue with a 4% perpetual growth rate.

• The based contribution margin and capital turnover would be the 2022 to 2024 average values. 

• The Reinvestment rate would be based on the past decade's values.

• The fixed cost would be based on the 2022 to 2024 average values. 

• The tax rate would be the decade’s average. 

On such a basis, I obtained an intrinsic value of RM 21.84 per share compared to its market price of RM 18.00 per share (23 May 2025). There is a 21 % margin of safety based on this Earnings Value.

Valuation model

I valued PETGAS based on a single-stage valuation model, as shown in Table 3. The basic equations used in the model are:

Free Cash Flow to the Firm or FCFF = EBIT(1 – t) – Reinvestment.

EBIT = Revenue X Contribution margin – Fixed cost. The earning was based on the business model shown in the right part of Chart 3.

Reinvestment was derived from the Reinvestment margin.

Table 3: Sample calculation 

The cost of funds was based on the first page results of a Google search for “Petronas Gas WACC”. Refer to Table 4.

Table 4: Estimating the cost of funds

Risks and limitations

I would like to think that my assumptions have not been aggressive. The valuation model resulted in the following performances.

• ROIC of 14.3 % compared to the past 3 years' average ROIC of 13.7 %.

• An EBIT margin of 37 % compared to the past 3 years' average EBIT of 36 %. 

• A free cash flow margin of 26 % compared to the past 3 years' average unlevered free cash margin of 22%.

Given this picture and my less-than-aggressive assumptions, you may think that there is potential upside. 

If the contribution margin and capital turnover were based on the past decade's average, all else being the same, the intrinsic value increases to RM 26.63 per share. 

However, this should be tempered by the lower fixed cost assumption. In my valuation model, fixed cost was assumed to increase at 4% CAGR. Over the past decade, fixed costs increased at a 4.8 % CAGR. A valuation based on this higher fixed cost growth rate would lower the intrinsic value.

Before you get all excited about the potential upside, remember that PETGAS delivered one of the better peer performances over the past few years. As such you would be expecting PETGAS to even do better. Is this realistic?

Case Notes On 1 April 2025 a major industrial incident occurred in Putra Heights, Subang Jaya, Selangor, Malaysia, when a Petronas gas pipeline leak triggered an explosion and subsequent fire. A total of 150 people was injured, and emergency evacuations were conducted within a 290 metres (950 feet) radius of the site. According to a 26 May 2025 Malay Mail article on “Petronas Gas expects RM 60 m profit dent, RM170 m in repairs after Putra Heights pipeline fire.”  Assuming a one-off impact and modelling as a reduction in the cash position, this RM 60 m plus RM 170 m costs would only reduce its value by RM 0.12 per share. This is not a significant impact from a long-term value investment perspective.

Case Notes

On 1 April 2025 a major industrial incident occurred in Putra Heights, Subang Jaya, Selangor, Malaysia, when a Petronas gas pipeline leak triggered an explosion and subsequent fire. A total of 150 people was injured, and emergency evacuations were conducted within a 290 metres (950 feet) radius of the site.

According to a 26 May 2025 Malay Mail article on “Petronas Gas expects RM 60 m profit dent, RM170 m in repairs after Putra Heights pipeline fire.” 

Assuming a one-off impact and modelling as a reduction in the cash position, this RM 60 m plus RM 170 m costs would only reduce its value by RM 0.12 per share.

This is not a significant impact from a long-term value investment perspective. 

Case Notes

On 1 April 2025 a major industrial incident occurred in Putra Heights, Subang Jaya, Selangor, Malaysia, when a Petronas gas pipeline leak triggered an explosion and subsequent fire. A total of 150 people was injured, and emergency evacuations were conducted within a 290 metres (950 feet) radius of the site.

According to a 26 May 2025 Malay Mail article on “Petronas Gas expects RM 60 m profit dent, RM170 m in repairs after Putra Heights pipeline fire.” 

Assuming a one-off impact and modelling as a reduction in the cash position, this RM 60 m plus RM 170 m costs would only reduce its value by RM 0.12 per share.

This is not a significant impact from a long-term value investment perspective. 

Case Notes

On 1 April 2025 a major industrial incident occurred in Putra Heights, Subang Jaya, Selangor, Malaysia, when a Petronas gas pipeline leak triggered an explosion and subsequent fire. A total of 150 people was injured, and emergency evacuations were conducted within a 290 metres (950 feet) radius of the site.

According to a 26 May 2025 Malay Mail article on “Petronas Gas expects RM 60 m profit dent, RM170 m in repairs after Putra Heights pipeline fire.” 

Assuming a one-off impact and modelling as a reduction in the cash position, this RM 60 m plus RM 170 m costs would only reduce its value by RM 0.12 per share.

This is not a significant impact from a long-term value investment perspective. 

Conclusion

PETGAS stands out as a fundamentally solid and consistently profitable midstream gas infrastructure company. It had stable cash flows, modest growth, and disciplined capital management. 

Despite a post-2021 margin compression driven by higher fuel costs, regulatory limits, and increased sustainability-related expenses the business remains resilient. There are signs that margins have since stabilized. 

Compared to global peers, PETGAS holds its ground with above-average returns on capital, strong free cash flow generation, and minimal debt. 

At a market price of RM 18.00 (as of 23 May 2025), the stock trades at a 21% discount to its intrinsic value of RM 21.84 per share. This is below my 30% margin of safety target.

Investment thesis

PETGAS is a financially strong, infrastructure-centric gas utility company. It has stable cash flows, high return on capital, and consistent dividend payouts. Its core businesses are underpinned by long-term contracts and regulated frameworks that offer visibility of earnings, even in cyclical energy markets. 

The post-2021 margins have normalized at a lower level due to higher input costs and regulatory constraints. But PETGAS continues to deliver steady operating profit and cash flow. With a cash-rich balance sheet and low reinvestment needs, the company is well-positioned to sustain dividends. But with a 21% discount to its intrinsic value, I would wait for a lower entry price for PETGAS. 

Case Notes An investment thesis is a vital tool for any investor because it provides clarity, focus, and direction in decision-making. Learning how to draft an investment thesis is crucial for investors, especially those who want to make well-informed, rational, and successful investment decisions.  It defines your reasoning. A clear thesis encourages disciplined decision-making. It helps assess risks. It provides a benchmark to evaluate whether the investment is performing as expected. An investment thesis is not set in stone - it is a living document. If the facts change, you can update your thesis or adjust your investment accordingly. This approach keeps you grounded and aligned with your investment principles.

Case Notes

An investment thesis is a vital tool for any investor because it provides clarity, focus, and direction in decision-making. Learning how to draft an investment thesis is crucial for investors, especially those who want to make well-informed, rational, and successful investment decisions. 

• It defines your reasoning.

• A clear thesis encourages disciplined decision-making.

• It helps assess risks.

• It provides a benchmark to evaluate whether the investment is performing as expected.

An investment thesis is not set in stone - it is a living document. If the facts change, you can update your thesis or adjust your investment accordingly. This approach keeps you grounded and aligned with your investment principles.

Case Notes

An investment thesis is a vital tool for any investor because it provides clarity, focus, and direction in decision-making. Learning how to draft an investment thesis is crucial for investors, especially those who want to make well-informed, rational, and successful investment decisions. 

• It defines your reasoning.

• A clear thesis encourages disciplined decision-making.

• It helps assess risks.

• It provides a benchmark to evaluate whether the investment is performing as expected.

An investment thesis is not set in stone - it is a living document. If the facts change, you can update your thesis or adjust your investment accordingly. This approach keeps you grounded and aligned with your investment principles.

Case Notes

An investment thesis is a vital tool for any investor because it provides clarity, focus, and direction in decision-making. Learning how to draft an investment thesis is crucial for investors, especially those who want to make well-informed, rational, and successful investment decisions. 

• It defines your reasoning.

• A clear thesis encourages disciplined decision-making.

• It helps assess risks.

• It provides a benchmark to evaluate whether the investment is performing as expected.

An investment thesis is not set in stone - it is a living document. If the facts change, you can update your thesis or adjust your investment accordingly. This approach keeps you grounded and aligned with your investment principles.

END

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If the above article was useful, you can find more insights on how to make money in my e-book. The e-book is now available from Amazon, Kobo and Google Play.

PS: If you are in Malaysia or Singapore, the e-book can only be download from Kobo and Google Play. 

Disclaimer & Disclosure

I am not an investment adviser, security analyst, or stockbroker.  The contents are meant for educational purposes and should not be taken as any recommendation to purchase or dispose of shares in the featured companies.   Investments or strategies mentioned on this website may not be suitable for you and you should have your own independent decision regarding them. 

The opinions expressed here are based on information I consider reliable but I do not warrant its completeness or accuracy and should not be relied on as such. 

I may have equity interests in some of the companies featured.

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