Downstream accounts for 44% of Petronas’ revenue and early indicators suggest the segment will be making weaker earnings for the 2Q

by MARK RAO/ pic by MUHD AMIN NAHARUL

PETROLIAM Nasional Bhd’s (Petronas) second-quarter (2Q) financial performance is expected to be impacted by the weaker performance of its listed downstream subsidiaries and oil price volatility.

The national oil and gas (O&G) company began the year strongly, posting a 9.4% year-on-year (YoY) jump in after tax profit to RM14.25 billion for the 1Q ended March 31 this year as group revenue grew 7% YoY to RM61.99 billion.

This was owing to the higher sales of petroleum products and liquefied natural gas achieved, as well as a weaker ringgit which resulted in translation gains for the firm.

The 2Q has seen reduced profitability from Petronas Chemicals Group Bhd (PetChem) and Petronas Dagangan Bhd (PetDag) as lower product prices and higher expenses weighed on their earnings.

“Petronas’ 2Q is expected to come in lower due to the weaker performance of PetChem and lower average oil prices.

“Quarter-on-quarter (QoQ) growth will likely be flattish at between 2% and 3% as average oil prices are not far from Petronas’ budget,” an industry analyst told The Malaysian Reserve (TMR).

Year-to-date, the average Brent oil contract price is at US$65.14 (RM272.94) per barrel — only slightly below Petronas’ US$66 per average budget for future planning.

Crude oil price was volatile in the 2Q, trading as high as US$74.57 a barrel and touching as low as US$59.97 per barrel, and is expected to weigh on Petronas’ upstream business which makes up close to half of the group revenue.

The downstream businesses account for 44% of Petronas’ revenue and early indicators suggest the segment will be making weaker earnings for the said quarter.

PetChem’s net profit declined 22.2% YoY to RM1.12 billion in the 2Q as revenue dipped 8.2% to RM4.34 billion, according to its recent exchange filing.

PetDag’s net profit contracted 45.1% YoY to RM172.75 million over the same period despite turnover improving 4.5% YoY to RM7.61 billion as lower average selling product prices offset the increase in sales volume.

The group’s logistics’s arm, MISC Bhd, posted stronger revenue and earnings for the quarter, while Petronas Gas Bhd (PetGas) is due to announce its results soon.

PetChem is one of the larger companies in the Petronas group, whereas PetGas is sizeable with a largely stable business and will continue to demonstrate slow but steady growth.

“For the second half of the year, PetChem is forecast to register weaker earnings QoQ on shutdown and turnaround activities and softer petrochemical prices,” the source said.

The downstream segment is slated to make up a larger part of Petronas’ portfolio once the US$27 billion Pengerang Integrated Complex (PIC), a joint venture between Petronas and Saudi Arabian Oil Co (Aramco), becomes fully operational.

As at March 31 this year, the downstream facility in Johor — which also houses the Petronas Refinery and Petrochemical Integrated Development (Rapid) project — was 98.9% complete. The commercial operation date is targeted for the 4Q of this year.

According to the industry analyst who spoke to TMR, the Rapid project is expected to ramp up operations later this year before the plant breaks even sometime in 2020 on a 60% utilisation rate.

“PIC is part of Petronas’ longer term balancing strategy and will result in the downstream business forming a larger part of the group’s earnings,” the analyst said.

“This is in line with the strategies adopted by other major O&G companies such as Aramco as the downstream segment cushions against the upstream performance which goes through cycles.”

The source said feedstock costs for downstream players fall as crude oil prices decline, while there is typically a three- to six-month lag before product prices are adjusted lower.

“In short, the downstream segment balances an O&G company’s portfolio very, very well.” Higher contributions from the downstream segment will likely only begin streaming in by late-2020 or early-2021.

Petronas will thus have to manage the volatility in energy prices over the near term to protect the profitability of its upstream exploration and production (E&P) business.