Petronas still the jewel of the country


Petroliam Nasional Bhd (Petronas) is widely expected to consolidate its position among the top-ranked global companies when it releases its 2018 financial year (FY18) results today.

All signs are pointing to a banner year for the national energy company after it emerged stronger and leaner from the 2014/2015 oil rout.

The Fortune 500 company already registered a profit after tax (PAT) of RM41 billion for the first nine months of 2018 — up 50.1% year-on-year (YoY) and short of just 10% to match the RM45.5 billion PAT attained in FY17.

Revenue over the nine-month period rose 11.9% YoY to RM181.07 billion on higher average realised prices for key products recognised.

Brent crude oil prices averaged US$72.13 (RM295.01) per barrel against US$51.90 per barrel in the corresponding period in FY17 for Petronas, and the improved outlook is expected to carry over into the final quarter of FY18 (4Q18).

The Malaysian Reserve reported earlier this week that Petronas’ resilience, production of good quality oil, long-dated liquefied natural gas (LNG) contracts and prudent spending will help the company outperform many global exploration and production players.

Absence of costly provisions — which weighed on its FY15 and FY16 performances and was a direct result of the 2014 oil crash — means the company can report clean earnings for FY18.

Petronas upping its dividend commitment from RM19 billion to RM24 billion in respect to FY18 — not including the RM30 billion special dividend announced — is further indicative of a strong finish to the
year, in terms of profitability.

Many are expecting the company to surpass the RM47.6 billion PAT achieved pre-oil crisis in FY14 as it is only 14% short of matching that figure.

A Prosperous Year

Petronas is exploring new markets, while continuing to improve its cost structure after successfully reducing opera- ting expenditure — not including payroll — by 23% at the end of 2017.

Via its subsidiary Petronas Lubricants International Sdn Bhd, Petronas made its first foray into the electric-vehicle (EV) market with its “iona” range of e-fluids for passenger cars.

The launch at the Geneva International Motor Show 2019 this week was part of Petronas’ pledge to lower carbon dioxide emissions and to meet demand from original equipment manufacturers who have to adhere to increasing environmental regulations.

Since its incorporation in 1974 to undertake the exploration, extraction and refining of Malaysia’s petroleum resources, Petronas is now present in over 50 countries worldwide and produces some 2.31 million barrels of oil equivalent per day.

The EV market could prove a new growth area for the company as more and more countries commit to reducing their carbon emissions.

Meanwhile, the ongoing multibillion Pengerang Integrated Complex (PIC) and LNG Canada projects place Petronas in a prime position to tap into future energy demand growth.

The downstream PIC facility is slated to add 300,000 barrels of crude oil and 220,000 barrels of fuel per day, as well as 3.3 million tonnes of petrochemical products per annum when it is fully operational later this year.

This will increase downstream contribution to Petronas’ overall operations in line with the direction taken by most oil majors in the market, while the LNG Canada project is timely given the expected LNG supply deficit from 2020 onward.

In Good Hands

A testament to both the growth of the company and its leadership, Petronas president and group CEO Tan Sri Wan Zulkiflee Wan Ariffin was named among the top 100 global Brand Guardians for 2019 — the first Malaysian CEO to be included in the list.

Wan Zulkiflee joined Petronas in 1983 as a process engineer and steadily climbed the ranks to eventually helm the national energy company as CEO in April 2015.

His task was considerable, given the oil crisis experienced that year, which caused crude oil prices to tumble to as low as US$28 per barrel in 2016 and Petronas to report meagre profits of RM20.8 billion and RM23.8 billion in FY15 and FY16 respectively.

Petronas has since emerged stronger and leaner following the downturn, and is now among the most well-run and efficient national oil companies globally, in no small part thanks to its current CEO. The Fortune 500 company is now leading among top 100 brand leaders.

Petronas is not only making strides in the business world, but in the corporate social responsibility (CSR) space
via the recent launch of Ya- yasan Petronas — aimed at delivering broader and deeper impact on local communities nationwide.

The national energy company has long been involved in CSR activities, having reportedly spent some RM3.6 billion on student scholarships since its incorporation in 1974.

However, the company’s CSR activities were previously compartmentalised. Yayasan Petronas hopes to adopt a wider and holistic approach to social work.

Uncertainties Remain

Sarawak took a monumental step in Malaysia’s post-independence history when it assumed regulatory control over its oil and gas (O&G) assets with the implementation of the Oil Mining Ordinance 1958 on July 1 last year.

This changes the dynamics of Malaysia’s O&G industry as Petronas was conferred regulatory authority and ownership over the nation’s petroleum resources via the Petroleum Development Act 1974.

Petronas indicated last year that it was in active discussion with Sarawak’s state-owned O&G vehicle, Petroleum Sarawak Bhd (Petros), to reach a working arrangement that is mutually acceptable and would keep Malaysia as an attractive O&G destination.

There have been no updates on this front, but talks will likely account for the government’s decision to grant all oil-producing states a 20% ro-alty from the gross profit of O&G development works.

This replaces the previous 10% royalty arrangement, divided equally between the federal and state governments of Sabah and Sarawak. Kelantan and Terengganu were previously granted compassionate funds.

The outcome of the discussions — presumably still being held between Petronas and Petros — could have an impact on Petronas’ business model, though not so much as to comprise the company’s viability in the industry.

This is especially imperative given the current government’s strained fiscal position. Petronas’ commitment to pay a total of RM54 billion in dividends to the government is unlikely a coincidence.

The higher dividend commitment theoretically means less money for Petronas to reinvest in new projects, and could defer smaller and lower-priority projects for the time being.

Nonetheless, Petronas’ prospects are promising on strong fundamentals and good leadership which should see the company through any uncertainties or challenges.