Despite higher earnings for Petronas in 2017, industry yet out of the woods


Petroliam Nasional Bhd (Petronas) is expected to record significantly higher profits for 2017, boosted by higher crude oil prices, but overall industry’s spending on exploration reactivating old wells will not see immediate recovery.

The state-owned oil company is enjoying the best period since 2014 as crude prices rose above the US$70 (RM280) level, prices last seen more than three years ago.

Besides higher revenues, Petronas will make less provisions, subsequently boost- ing its net earnings.

Analysts, however, do not expect the national energy company would return to its expansionary spending of the past, and would take a conservative approach on capital expenditure and project selection.

For the first nine months of 2017, the energy firm recorded RM41 billion in net profit, almost double the RM23.5 billion in profit after tax (PAT) recorded in the whole of 2016.

Lower impairment on assets and costs recognised by the oil and gas (O&G) licensor could even help Petronas eclipse the RM47.6 billion PAT posted in 2014. Petronas delivered the best financials in 2013 with net earnings of RM65.6 billion.

Turnover for the January-September 2017 period was 15% higher year-on-year to RM161.83 billion.

Brent crude oil price had risen from US$53 per barrel on Sept 1, 2017, to close the year at about US$67 per barrel.

But, worries over shale production would stifle the present oil price and Petronas has been conservative in their estimates.

AmInvestment Bank Bhd senior VP of equity research Alex Goh said Petronas is unlikely to undertake any aggressive exploration and development activities in the near term as the market is anticipating a correction in oil prices.

“Investors and oil majors are cautious of the impact of US shale production on the oil market,” Goh told The Malaysian Reserve.

“There is an expectation of a pullback in the oil price rally with many factors influencing the market, including seasonal factors with a record cold Northern winter and hedge funds on long positions.”

He said the geopolitical tensions in the Middle East and possible sanctions on Iran — the world’s third-largest oil producer — could affect oil prices.

Without Petronas’ goodwill in giving new lucrative contracts, many O&G service providers are expected to struggle a little longer.

Analysts also do not see a fast jump-start to exploration work.

MIDF Amanah Investment Bank Bhd equities research analyst Aaron Tan said that this would be the case for other oil majors in the market as companies favour conventional sources of oil over exploration projects.

“Typically, exploration activities involve shallow or deep water projects, which represent unconventional sources of oil.

“Such activities have a success rate of approximately 10%. So, oil majors generally look out for conventional sources of oil (eg well drilling) with projects closer to shore,” Tan said.

BMI Research in a note said after breaking the US$70 per barrel mark last week, oil prices could be due for a correction in the coming months.

“From a technical perspective, the rally in crude has begun to look somewhat stretched,” noted the report conducted by Business Monitor International Ltd (BMI) that was published last week.

“Prices are approaching two key targets, namely US$69.6 per barrel (the 100% retracement to the post-oil collapse high in 2015) and US$71.4 per barrel (the 50% retracement to the 2014 high), before the collapse in Brent.”

It said that tests of these levels could significantly influence price direction over the coming weeks with a number of potential triggers, including seasonal reduction in crude demand from refiners, US shale growth and crude inventory builds, and the higher oil price environment inducing increased output from producers with capacity for growth.

Petronas is not expected to change its investment policies for the next three years.

The upstream segment — one of the worst-hit sectors when oil prices crashed in 2014 — is to see production lowered by approximately 100,000 barrels per annum than what was achieved during 2012 and 2014.

“For O&G players in Malaysia, the picture has not changed and there will continue to be high competition for work and contracts, especially in the upstream segment.

“This is true for both small and large firms alike,” Goh added.