Weak oil prices likely to hit Petronas’ 4Q earnings

Analysts are not painting a rosy picture for Petronas, especially after its net profit for 3Q19 was slashed by half on the oil-price downturn


MARKET observers are bracing for a weaker result from Petroliam Nasional Bhd (Petronas) as lower oil and natural gas prices in the fourth quarter last year (4Q19) are expected to weigh on its operations.

The national oil giant is expected to release its full-year result later in March and most analysts do not seem to paint a rosy picture, especially after its net profit for 3Q19 was slashed by half to RM7.42 billion against RM14.62 billion the year prior on the oil-price downturn.

Other indicators include US major oil producers Exxon Mobil Corp and Chevron Corp that have been projected to record weaker results.

Analysts have lowered their earnings forecast for Exxon by an average 20 US cents per share, excluding gains from asset sales. The two companies are expected to announce their results later today.

Brent crude oil price averaged at about US$64 (RM262.40) per barrel last year, with its highest in May at US$72 per barrel and its lowest at US$58 per barrel in October.

Despite ongoing cost-cutting efforts, Petronas’ cumulative profit for the first three quarters last year was lower at RM36.36 billion against RM40.99 billion mainly on lower average realised prices for its major products.

The group derives the bulk of its income from petroleum products at 38%, followed by liquefied natural gas (21%), and crude oil and condensates (16%), according to its annual report.

“I think the results are binary to lower oil prices that have been caused by global oversupply. The only respite for prices has been the unexpected rises in geopolitical risk.

“Production cost is falling, but not enough to offset the slide in price. I don’t think this is a huge surprise given the outlook for oil and gas (O&G) has remained challenging for some time as investment flows continue to wane in O&G as investors are moving into environmental, social and governance investing,” AxiTrader Ltd chief Asia market strategist Stephen Innes told The Malaysian Reserve in an email reply.

A growing number of investors is pouring money into sustainable funds which give consideration to companies’ environmental, social and legal standards.

This comes after governments pledged to meet the United Nations-backed Paris Agreement’s goal of cutting emissions to net zero by the end of the century.

Fund tracker Morningstar Inc estimated these funds to take in over US$16 billion in net new deposits in 2019, triple the US$5.5 billion recorded the previous year.

Big oil firms Chevron, Exxon, BP plc and Royal Dutch Shell plc are among the top 20 companies in the world that contribute to more than a third of all greenhouse gas emissions in the modern era, The Guardian revealed.

Companies have taken efforts to be more sustainable since, but investors continue to push for change.

Oil and gas firms are among the biggest dividend payers, making it difficult for funds to divest from them. Petronas alone, is expected to pay RM54 billion in dividend to the Malaysian government.

On the outlook of global oil prices this year, Innes said they are likely to remain uncertain given the demand devastation from the virus outbreak.

The rising death toll from the coronavirus outbreak continues to exert downward pressure on oil prices, with OPEC considering to push its meeting to February to mitigate its effect.

“Still, when prices eventually rise, the operation efficiencies made over the last few years should subsequently take hold. The broader impact is to the Malaysia budget coffers as Petronas revenues are expected to fund the Malaysia budget deficit,” Innes said.

Meanwhile, Institute for Domestic and Economic Affairs senior economist Adli Amirullah expects the severity of the US-Iran conflict and the US election to determine oil prices this year. The US presidential election is scheduled for Nov 3.