By Khairul Khalid
Petronas’ dreadful performance for 3Q15 – profits plummeted 91% to just RM1.4 billion – highlights the critical need for consolidation among local oil and gas players.
Sector background: On Oct 11, Petronas posted results of its third quarter of its financial year 2015 (3Q15), one of its worst-ever quarterly performance. Profit after tax (PAT) dropped drastically by 91% year-on-year to RM1.4 billion, on the back of RM60 billion revenue (down 25% year-on-year).
For the first nine months (9M15) of 2015, Petronas’ revenue has fallen 25% year-on-year to RM187 billion, while PAT was down 57% year-on-year to RM24 billion.
According to Petronas, much of the poor results were due to its upstream business (exploration and production segment). For 9M15, PAT for the upstream segment dropped 69% year-on-year to RM14 billion.
This was caused by lower crude and liquefied natural gas (LNG) prices, as well as RM5.4 billion written down as a non-cash impairment charge.
Petronas blames the sustained oversupply of oil and gas (O&G) in the market to external factors such as slowing economic growth in China, the refusal by the Organisation of Petroleum Exporting Countries to cut production and an imminent lift of sanctions on Iran’s oil trade adding to the glut.
On a brighter note, Petronas’ downstream segment business has grown, with PAT up 38% year-on-year to RM7.3 billion for the first nine months. In 3Q15, PAT for the downstream business segment increased 33% year-on-year to RM2 billion.
Petronas attributed this to higher refining margins and marketing margins, as well as improved plant performance for refineries and petrochemical plants. A stronger US dollar was also a mitigating factor to the overall results.
Despite current market volatility, Petronas president and group chief executive officer Wan Zulkiflee Wan Ariffin said that Petronas still remains committed to most of its huge capital expenditure projects which include the RM90 billion Refinery and Petrochemical Integrated Development, the RM130 billion Pacific NorthWest LNG project in Canada, the LNG Train 9 in Bintulu, and two Petronas Floating LNG projects being constructed in South Korea worth RM19 billion.
Petronas plans to spend RM350 billion in capital expenditure over the next five years. It has also announced a lower dividend to the government, with an agreed RM16 billion dividend to be paid in 2016 compared to RM26 billion paid for this year. The company is working on an average crude oil price of US$48 per barrel for 2016.
What analysts think: According to Public Bank in a report dated Nov 13, Petronas’ weak results dampen the outlook for the overall market. It downgraded its sector call on O&G.
“We are downgrading our sector call to ‘neutral’ for the interim in view of the dragged out lower oil price landscape and on account of our stock fair values having been attained since our sector call upgrade,” said Public Bank.
Public Bank expects the downtrend to continue with oil price fluctuating between US$40 to US$50 per barrel.
“Another bleak quarter is in store. Many companies will continue to take the hit with slower upstream activities that have trickled down to the service players,” said Public Bank.
“We continue to expect this trend to linger, at least until the impact of oncoming crude oil supplies are absorbed into the market bringing storage levels down and to a consistently low level.”
Analysts from UOB Kay Hian (UOBKH) echoed these bearish sentiments and maintained its “underweight” call on the O&G sector.
“Year 2016 is set to be another testing year where earnings risks and oil price volatility may persist. Channel checks suggest that Petronas has to continuously readjust capital priorities and may further defer upstream activities,” said UOBKH in a report dated Oct 12.
UOBKH also added that local O&G players will also suffer the negative impact of Petronas’ slump.
“Service players with high dependence on Petronas jobs like Barakah, Malaysia Marine and Heavy Engineering (MMHE), Perisai, Dayang, and UMW O&G (Petronas had reportedly placed its rig on standby rates/idle) will be affected.
“More companies could face further book value deratings, like in the case of MMHE/Perisai which underperformed by more than 30% year to date. Stocks under our coverage which could face earnings risks in 2016 are SapuraKencana, Bumi Armada, Barakah, MMHE and Perisai,”said UOBKH.
Peer comparison:
StockStalk: The trickle effects of Petronas’ continuing slump in fortunes cannot be overstated. It is threatening to drag the whole of Malaysia’s O&G industry down. Most local O&G companies are heavily dependent on Petronas for projects.
Potential investors in O&G-related counters will be doubly alarmed by the latest warning by Wan Zulkiflee. He has again raised alarm bells about Malaysia’s overcrowded O&G industry and the urgent need for consolidation.
“I feel that the consolidation among players within the Malaysian O&G industry is not happening as fast enough. There are too many local O&G companies in Malaysia and not enough jobs for the in the current climate.”
“There is a big drop in work going around. There is not enough work volume for Malaysian O&G companies in the next five years,” the Petronas CEO said during the 3Q15 results announcement.
Wan Zulkiflee said there are approximately 3,200 O&G companies in Malaysia registered with Petronas. In Norway, there are just 700 O&G companies.
“Most Malaysian O&G companies are small in size and the industry is very fragmented. I hope that our colleagues in the industry will heed this call and internalise that the only way out of this storm is to combine forces and become stronger players,” said Wan Zulkiflee.
The Petronas CEO gave a shocking example of overcapacity in the local O&G industry.
“There are eight fabrication yards in Malaysia with a total capacity of 120,000 metric tonnes. Next year, it is estimated that there will only be about 20,000 metric tonnes worth of fabrication jobs,” said Wan Zulkiflee.
That works out to just 17% utilisation of market capacity at best. Judging by these stark numbers alone, it would seem that strategic mergers and acquisition will be critical for the survival of many local O&G players already suffering from Petronas’ cuts in operational and capital expenditures.
Recently, there were strong rumours – subsequently denied by both parties – of a tie-up between Bumi Armada and Malaysia International Shipping Corp, the shipping arm of Petronas.
This could set the tempo for next year and investors may take a punt on counters that could be targets for acquisition. Even then, given the continuing volatility of prices, putting money into O&G ventures won’t be the sure bet it was just 18 months ago.
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Important Note and Disclaimer: This article should NOT be taken as a cue to either buy or sell any stocks. The intention is to highlight the key factors you might want to think about before plunging in or scrambling out. While KINIBIZ makes every endeavour to ensure facts are right and opinion is fair, no liability can be assumed for anyone relying on this information. In other words let the buyer (or seller) beware — a reflection of Bursa Malaysia, we say.
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