Petronas tells O&G players sustainability of stronger oil price remains to be seen
WHILE the worst of the downturn in the oil and gas (O&G) industry is now over, the outlook is not blue skies. Cost is already showing signs of increasing at a worrying rate, and there is now some premature exuberance among the industry players.
Players should not drop the austerity mindset otherwise all the previous efforts from Petronas’ intensive cost-efficiency efforts over the last three years will be negated.
This was the key message that Petroliam Nasional Bhd (Petronas) president and group chief executive officer Tan Sri Wan Zulkiflee Wan Ariffin wanted to highlight when he presented Petronas’ stellar full year financial results to Dec 31, 2017 to a room full of reporters.
Wan Zulkiflee also emphasised that the current stronger oil price was now supported by production cuts of the Organisation of Petroleum Exporting Countries (Opec) and non-Opec countries, hence the sustainability remains to be seen.
“Therefore, it is imperative to continue to keep costs under control, increase efficiencies and drive up value,” he said.
Certainly, oil prices have recovered remarkably since it started crashing from its high of US$110 in mid-2014. It hit its low of US$27 in January 2016, and has since been on a steady uptrend.
For the most part of 2017, oil prices hovered between the US$50 and US$65 level. Brent traded at US$64 as of press time yesterday.
Overall, Petronas announced strong financial results, both for its fourth quarter as well as its full year to Dec 31, 2017 due to stronger oil prices along with the group’s ongoing transformation efforts which focused on cost optimisation and efficiency improvements.
For the fourth quarter to Dec 31, 2017, Petronas’ profit after tax increased by 61% to RM18.2bil from RM11.3bil in the corresponding quarter last year due to higher revenue and lower net impairment on assets and well costs.
As a result, earnings before interest, taxation, depreciation and amortisation (ebitda) was also higher by 15%, at RM25.3bil compared to RM21.9bil in the corresponding quarter last year.
The group’s revenue rose to RM61.8bil, 14% higher compared with the corresponding quarter last year. This was contributed by higher average realised prices recorded for major products and higher sales volume mainly from LNG and petroleum products, partially offset by the effect of the ringgit strengthening against the US dollar.
The positive fourth quarter results were also driven by the upward trend of key benchmark prices and better margins.
“The continued drive for higher productivity and operational excellence have placed Petronas in a stronger position to execute its long-term growth strategy. Subject to sustainability of price recovery, the group expects to deliver a satisfactory performance in the next financial year,” Wan Zulkiflee told a press conference.
Meanwhile, for the full year, Petronas’ profit after tax jumped by 91% in 2017 to RM45.5bil, compared with RM23.8bil recorded in 2016.
The increase was achieved on the back of higher revenue, lower net impairment on assets and well costs and continuous efforts to optimise costs in 2017.
The group’s revenue increased by 15% to RM223.6bil compared with RM195.1bil recorded in 2016. The increase was mainly due to higher average realised prices recorded for major products coupled with the effect of weakening of the ringgit against the US dollar. This was partially offset by lower sales volume for crude oil & condensate and petroleum products.
Cumulative 2017 ebitda rose to RM92bil compared with RM70.7bil recorded in 2016, in line with higher profits.
Ratilal: At current price levels, we have done a lot of adjustments to our asset values, and these have been done over the last three years.
Cash flows from operating activities improved to RM75.7bil, an increase of 41% from RM53.8bil in 2016.
Total assets as at Dec 31, 2017 was slightly lower at RM599.8bil compared with RM603.4bil as at Dec 31, 2016 primarily due to the impact of the ringgit strengthening against the US dollar.
Shareholders’ equity of RM389.8bil as at Dec 31, 2017 increased by RM9.4bil compared to last year mainly due to profit generated during the year.
The group’s gearing ratio remained stable at 16.1% compared to 17.4% recorded last year. Return on capital employed (ROACE) increased to 9.8% compared to 5.4% in 2016, in line with higher profits.
Capital investments for the year ended Dec 31, 2017 totalled RM44.5bil, mainly attributable to the Refinery and Petrochemical Integrated Development (Rapid) project in Johor.
Below are excerpts from the Q&A session Wan Zulkiflee had with reporters. Also present was Petronas executive vice-president and group chief financial officer Datuk George Ratilal.
Petronas paid RM16bil in dividends in 2016. What was Petronas’ dividend payment in 2017 and what is it planning to give out in 2018?
WZ: We gave out RM16bil in 2017. For 2018, we are planning to give out RM19bil in dividends
Petronas spent RM44.5bil in capex for 2017. Will this increase in 2018?
WZ: Yes, this year Petronas is planning to spend more, around RM55bil.
Oil price estimation when planning its budget:
When Petronas planned its budget and capital expenditure in 2017, it planned it based on oil prices of US$45. What is Petronas’ estimation of oil prices when it plans its budget for 2018?
WZ: We will be basing our budget similar to the Government’s budget, which is at Brent oil prices of US$52 per barrel.
Outlook for oil price in 2018:
WZ: There are many things that affect oil prices. The Opec voluntary cuts, supply and demand, and also the speculative element. As a company, we are very conservative, and our forecast is somewhat lower than current prices, and this morning Brent was US$64.
In the bigger scheme of things, we are such a small player.
I think the global demand is about 97 billion to 98 billion of barrels a day, and we produce only half a million barrels a day. So in the overall scheme of things, we are small.
Going forward, I think oil prices will be decided by the bigger players. I think we need to look at inventory levels. That is the criteria we know that we have to achieve collectively, for Opec and non-Opec countries. Based on the inventory levels, Opec will decide whether they want to continue with the production cuts.
WZ: I have been on record to say that we welcome any such state-owned bodies or business entity in the oil and gas business. We welcome their participation, as long as it is set up within the proper arrangements that have been made.
Who decides on Petros’ investments, and who will be the governing body for Petros?:
WZ: I think since this involves Petros, it is better you ask them. I don’t think I am in a position to respond for Petros.
Level of consolidation among the oil and gas players:
WZ: There have been attempts by a few industry players in Malaysia, but I think it is not as material as we had hoped for. I know its not easy. But I think going forward, we still need competitive big companies to serve the industry in Malaysia and in the region. So we are still encouraging companies to consolidate.
Petronas’ Canada project:
In 2017, one of the significant decisions made by Petronas was not to proceed with the Final Investment Decision on the Pacific North West LNG project and the Prince Rupert Gas Transmission project in Canada. However, Petronas will continue to evaluate options to monetise gas in Canada. So what is the status on Canada?
WZ: Yes, we are producing about 600 million standard cubic feet of gas for the local markets.
And we have world-class gas assets. The proven resources are about 23 trillion standard cubic feet. So, yes we will definitely continue to explore all options that we have to monetise this resource. This is an ongoing process.
GR: At current price levels, we have done a lot of adjustments to our asset values, and these have been done over the last three years. So if prices remain at this level, we don’t see any significant impairments. Impairments happen for two reasons – one is price levels and therefore future cashflows need to be adjusted lower.
The other reason is a breakdown in operational aspects. So that is if something happens somewhere in the business. That, we can’t quite predict. However, besides that, we don’t expect any substantial level of impairments similar to what happened in the last two years.
WZ: Today, we dont’ have any big plans for retrenchment. However, as an ongoing exercise and this is nothing new and special, we have got a process where repeated non- performers will have to leave. But this is normal and has been done for many years now.
There is now no specific programme for retrenchment.
FLNG 1 and FLNG2:
Petronas has commissioned the world’s first floating liquefied natural gas (FLNG) liquefaction, storage and offloading vessel – Petronas FLNG Satu – which is now operating offshore in Sarawak. What are the plans to set up a second FLNG?
WZ: FLNG 1 has delivered six cargoes, and we are happy with its performance.
FLNG 2 is now under construction. It will be in operations in 2020. We are confident that we are on track to be operational by then.