Petronas could slash capex as sector slumps into disarray

State-owned energy company plans capex of RM50b this year, but with the pressure to deliver more dividends to the govt, the spending may likely see a cut

by SHAZNI ONG / pic by MUHD AMIN NAHARUL

PETROLIAM Nasional Bhd (Petronas) could cut its capital expenses to the tune of RM20 billion as the coronavirus pandemic and oil price war send the sector into disarray.

Global oil companies had already announced capital budget cuts as crude prices continued to slide in the last two weeks, including the largest single day fall since the Gulf War in 1991.

The demand for oil had dropped as more countries force their citizens to stay home, vehicle movements restricted, airlines ground planes and economic activities in many countries come almost to a stop.

Some analysts had predicted that the Covid-19 pandemic and the absence of enough storage as demand thinned could drive crude oil prices to just US$10 (RM43.87) a barrel. Reports suggested that the demand for oil had already dropped by 10 million barrels per day.

Petronas plans to spend about RM50 billion this year for its capital expenditure (capex), but with the pressure to deliver more dividends to the government, the spending may likely see a cut.

Putra Business School Assoc Prof Dr Ahmed Razman Abdul Latiff said it is almost certain Petronas will cut its capex this year to survive the current oil crisis.

“With the current oil price below US$30 per barrel and a louder call for the government to ask for additional dividends to the tune of RM20 billion on top of the RM24 billion declared for this year, Petronas will have little room to manoeuvre especially as its cash holding now stands at RM81.8 billion.

“Most likely the capex for this year will be reduced to around RM30 billion with the majority of this capex to be spent on domestic activities, which at the same time is going to help spur the domestic market,” he told The Malaysian Reserve (TMR).

Petronas last month said it had capped spending at RM50 billion for 2020 based on the assumption that the oil price is at US$50 per barrel this year.

Besides tumbling oil prices, gas prices had also fallen significantly, weighing further on the state-owned energy company’s financials. Natural gas price continued to be volatile this month and was trading at US$4.82 in November 2018 but trading at US$1.87 (at press time).

“Last year, Petronas spent between RM26 billion to RM28 billion on domestic capex, so they probably will maintain the same expenditure as they definitely are not going to spend much capex overseas due to the low oil price and weakening ringgit.

“Therefore, local sub-sectors pretty much will be protected if this is the case. If Petronas had to declare a special dividend of RM20 billion on top of the already declared RM24 billion, this will still leave them with more than RM60 billion in cash, enough for their domestic capex,” Ahmed Razman said.

He said oil price is expected to remain low for the next few months and Petronas’ profit will be lower this year.

BIMB Securities Sdn Bhd analyst Azim Faris Ab Rahim said Petronas will likely cut its capex if the low oil price regime prolongs, as a way to conserve its cash for future investment.

“On the amount that it needs to cut, we think Petronas needs to balance between its cash requirement and its role as the sole guardian of Malaysia’s oil and gas (O&G) sector.

“If they cut too much, this will put the industry’s sustainability at risk, given that it has slashed local upstream capex significantly during the previous market downturn.

“Fortunately, its downstream investment — Petronas’ Pengerang Integrated Complex — is currently at the tail-end stage of construction.This means it will free up its capital, which will allow it to continue with counter-cyclical investment in the local upstream sector,” he told TMR.

Azim Faris said Petronas would need to engage its contractors to reduce the service costs.

“At this time, we think it may probably maintain some level of offshore activities, but at a reduced rate in order to avoid another round of massive retrenchment in the sector.

“We believe it is Petronas’ duty (or national service) to maintain sufficient human capital to continue serving the sector.

“This is the least it can do to serve the government interest since it may not be able to give a special dividend to the government anymore this year (like the RM30 billion paid in 2019),” he said.

Affin Hwang Investment Bank Bhd said Petronas would cut its capex due to the prolonged low oil price environment.

“Based on our recent channel checks with industry players, there are not many signs of Petronas delaying its 2020 work programme. However, we gather that downward revision in capex spending, rates and work activities tend to have a six-month lag.”