Petronas sucker punched by RM22 bil impairment

By Khairul Khalid

A RM22 billion write down, due to the oil price slump, wipes out Petronas’ profits in 4Q14, turning it into RM7.3 billion losses. It also hangs big question marks on the future of Petronas’ overseas ventures, such as the RM100 bil Canadian LNG project.

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How does an oil giant’s RM22 billion quarterly gross profit morph, almost instantaneously, into RM 7 billion net losses instead?

In Petronas’ case, the sucker punch for its financial year 2014 (FY14) results was a stunning RM22 billion in asset impairments.

It was forced to write down the massive amount due to the current oil price crisis, effectively wiping out Petronas’ fourth quarter profits for 2014 (4Q14).

“It’s a standard accounting procedure,” said George Ratilal, Petronas’ group chief financial officer (CFO).

Revaluation of assets

The impairment write downs are basically a revaluation of Petronas’ oil assets. Plunging oil prices also mean that Petronas’ production assets (such as plants and equipment) are most likely worth less, hence the revaluation.

“The RM22.6 billion impairments are non-cash items. We have had to reassess the value of our assets and write down RM22 billion due to the fall in crude oil price,” said Ratilal.

The price of crude oil price has collapsed up to 50% in the last six months, due to a glut in global supply caused by a combination of economic and political factors.

Petronas’ profits crashed in its most recent financial results for 2014 (FY14), with an unprecedented RM7.3 billion losses in 4Q14 dragging down the whole financial year’s (FY14) profits down 27%.

The state oil company had never posted any quarterly losses since it started filing financial reports to the public on a quarterly basis five years ago.

Considering the deep uncertainties surrounding oil prices and gloomy economic outlook this year, Petronas remain vulnerable to swing shifts in prices and consequently, revaluation of its assets.

No breakdown of impairments

Which Petronas assets – domestic or international – were revalued and by how much?

It is unclear from Petronas financial statements. It doesn’t provide any details or breakdowns of the impairment exercise, only providing a total amount of impairment to be charged.

Petronas has not responded so far to KiniBiz’s request for a detailed breakdown of the RM22 billion impairments.

The massive writedowns shines the spotlight again on Petronas’ selective financial reporting. The state oil company has been criticised in the past for failing to provide full disclosure in its financial reports.

For example, Petronas only provides geographical breakdowns for revenue in its financial results, but not for profits and losses.

It has a business presence in over 30 countries around the world. Petronas’ overseas segment contributed a whopping 43% of Petronas total revenue in its financial year 2013, amounting to RM136 billion.

Yet, there are no country-by-country breakdowns of financial performance.

Glaring anomaly

Compared with other international oil majors, Petronas is found wanting. Shell discloses their geographical earnings, ExxonMobil and BP show their US and non-US earnings. Even Malaysian GLCs (government linked companies) with investments overseas such as Sime Darby has better financial disclosure than Petronas.

“It’s a glaring anomaly, for such a company with huge public interest. Petronas needs to be more transparent in its financial results,” said an industry observer.

One of its major overseas investments that will come under increasing spotlight in recent months is Petronas’ RM100 billion LNG (liquefied natural gas) project in British Columbia, Canada.

After announcing the 4Q14 RM7.3 billion losses, Petronas announced that it will be delaying its FID (final investment decision) on the project in British Columbia at least until June this year, mainly due environmental impact assessment by the British Columbian government that is only due in April.

“We are just being prudent. We can still afford to wait until the end of June this year and still complete the project within 48 months,” said outgoing CEO Shamsul Azhar Abbas.

More delays on Canadian project?

Despite Petronas’ assurances, there is still the possibility that the project could be delayed further indefinitely if oil prices don’t stabilise. There were speculations last year that due to regulatory delays, Petronas was considering pulling out of the project altogether.

“We will continue to monitor the situation,” said Shamsul recently.

The FID was supposed to be made at the end of last year and was delayed several times. Some analysts had even predicted that the oil price slump is most likely the final nail in the coffin for the US$30 billion (RM109.4 billion) project.

The project known as Pacific Northwest LNG could cost an estimated RM100 billion in total for a duration of 20-25 years, including the construction of a 980 kilometre pipeline to transport gas to LNG terminals in British Columbia for export.

Despite selling 32% equity of Pacific Northwest LNG (possibly up to 50%) to international partners to share costs, the snag in any potential decision to pull the plug on the project is the fact that Petronas has already invested RM16 billion in the venture.

In 2012, Petronas acquired Canada’s Progress Energy Resources for that much (about US$5 billion then) giving it ownership of shale gas properties in northeastern British Columbia. The additional US$30 billion investment in Pacific West LNG project is integral to its Progress Energy purchase.

Patchy track record overseas

Other than its ill fated Canadian venture, Petronas’ profits slump also inadvertently shines the spotlight on its other overseas investments.

Petronas’ track record in its international ventures has been patchy at best. In recent years, it has had to pull out of its exploration and production operations in India, Venezuela and Uzbekistan, although it still maintains its presence in war torn Sudan.

It is difficult to evaluate these ventures, whether to deem them successes or failures, because Petronas does not reveal how profitable each of its foreign joint ventures are.

Subramaniam Pillay, professor in International Finance at Taylor’s University, said that the continuing uncertainty over oil & gas prices means that Petronas overseas investments, such as the Canadian project, would need to be reappraised.

“I am sure Petronas is not going to respond in a knee jerk reaction. They will have to look at long run supply and demand for oil and gas and make appropriate decisions,” said Subramaniam to KiniBiz.

However, the professor said that scaling down foreign investments that are perceived to be riskier to focus on domestic production is not necessarily the best solution for Petronas .

“Whether it is domestic or international, Petronas should weigh risks against benefits. How can you be sure that domestic investments are less risky?” said Subramaniam.

Regardless, the drastically altered oil & gas landscape means that new Petronas CEO, Wan Zulkiflee Wan Ariffin, will have many tough decisions to make in the months to come.

Yesterday: Petronas’ crashing profits – blip or crisis?