Petronas caught between sustainability and dividend commitments

While the higher dividend payment is deemed reasonable, the depleting capital health is a growing concern for the NOC


MALAYSIA’S oil and gas (O&G) sector faces the challenge of ensuring energy security, social impact and environmental sensitivity does not pose risks to long-term earnings growth.

Maybank Investment Bank Bhd (Maybank IB) analyst Liaw Thong Jung said the higher dividend commitment set by the national oil company (NOC), Petroliam Nasional Bhd (Petronas) put its financials under further scrutiny against the backdrop of volatile oil market, Covid-19 pandemic and energy transition.

“While the higher dividend payment is deemed reasonable amid the improved financials and its role as an NOC, the depleting capital health is a growing concern as it confronts the energy trilemma in the face of the volatile oil market, shrinking capital expenditure (capex), energy transition challenges and environmental, social, and governance agenda, to name a few,” Liaw wrote in a research report recently.

Following the improved financial performance, Petronas will now commit to a higher dividend payout of RM25 billion to the government in 2021.

The group will pay a special dividend of RM7 billion now, on top of its earlier commitment of RM18 billion for 2021, Liaw noted, adding that this is the third consecutive year that Petronas is paying special dividends (2019: RM30 billion; 2020: RM18 billion).

“As a consequence, its net cash has fallen to RM60 billion now from RM105 billion in 2018,” Liaw said.

Regardless, Maybank IB remained positive on the O&G sector with a key ‘Buy’ call for Dialog Group Bhd and Yinson Holdings Bhd.

Petronas reported stronger sequential results, as expected, in line with global peers.

Petronas’ core net profit grew 3% quarter-on-quarter to RM7 billion for its second quarter ended June 30, 2021 (2Q21), fuelled by higher oil price, net cash, improved free cashflow and lower capex.

The group’s 2Q21 results have taken core earnings for its first half of 2021 (1H21) to RM14 billion, an increase of 49% year-on-year.

Its capex for 1H21, totalling RM12.6 billion, accounted for 28% to 32% of its planned RM40 billion to RM45 billion for 2021.

Petronas has outlined a five-year capex plan of about RM200 billion to RM225 billion in 2021 to 2025 whereby 55% would be for domestic operations and 9% is on its green energy agenda.

The company foresees a healthy dividend payout to the government for financial year 2021 (FY21) as energy prices are expected to remain at a favourable level.

An industry analyst said with crude oil prices expected to maintain above the US$60 (RM251.45) a barrel level for the remainder of the year, that would improve the profitability of the NOC.

“Assuming commodities prices remain at the current level, we expect the dividend payout ratio to be less than 100% for FY21.

“This is in contrast to FY20 which is an exceptional year where Petronas has forked out more than what it earned. It is a good thing that last year’s overpayment will not recur this year because it’s just not sustainable,” the analyst told The Malaysian Reserve previously.