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Petronas’ Drooping Profits

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In tandem with the steep decline in oil prices, Petroliam Nasional Bhd (Petronas) is expected to report less than RM10bil in pre-tax profit for its soon-to-be released fourth-quarter results for the financial year 2014 (FY14), say industry sources.

The price of Brent crude has more than halved from the high of US$115 recorded in mid-June last year to about US$55 a barrel currently, with the slide largely happening in the final three months of the year.

For the current year of operations, analysts are expecting Petronas, which is expected to announce its 2014 fourth-quarter results in the next few weeks, to record a sombre set of results.

“This year’s earnings are expected to be between RM45bil and RM50bil based on current trends of oil price movements. It will be a significant drop from the previous years,” said sources.

According to analysts, if oil was more than US$80 per barrel, then Petronas’ pre-tax profit would be close to RM70bil or more.

“However, the drop in oil prices has been steeper, which could mean that projected pre-tax profit will be down significantly,” said an analyst.

Due to its lower profit projection, Petronas’ payout to the Government in the form of dividends, taxes, royalty and export duties is also expected to be down by almost 50% for this year compared with an estimated RM73bil in 2014.

“The contribution is expected to be down by almost 50% to about RM35bil for 2015, as Petronas goes through a period of adjustment to cut down its capital and operating expenditure. This is based on a payout ratio of 50%,” said a source.

“The contribution to the Government will, however, increase from 2016 onwards, but will not be to the tune of previous years unless oil stays above US$80 per barrel.”

In 2013, Petronas’ total contribution to the Government in the form of taxes, dividends, royalties and export duties stood at RM67.6bil, while in 2012, it amounted to RM80bil.

The reason why Petronas is able to give the Government a decent payout for 2014 is because its average selling price for the first nine months of last year was at US$101.85 per barrel.

However, in the final quarter of 2014, the average price of Brent crude, according to data, was about US$77 per barrel.

For its third quarter between July and end-September 2014, the national oil company had recorded a pre-tax profit of RM22.8bil on a revenue of RM80.4bil.

For the first nine months of last year, its pre-tax profit came in 2% higher at RM78.0bil, while revenue was up 7% to RM249.8bil compared to 2013.

As at end-September, meanwhile, it had a cash balance of RM140.6bil.

“But the slump in profits will impact cashflow from operations, meaning Petronas will have to dig into its reserves and opt for borrowings to finance its capital expenditure (capex) that it has committed to,” said an analyst.

According to sources, based on the final-quarter estimates of less than RM10bil in pre-tax profit, Petronas’ full-year pre-tax profit for FY14 could come in the region of RM88bil to RM90bil.

“This is by the general rule of thumb that for every US$1 drop in crude oil, the impact to Petronas’ pre-tax profit is estimated at RM1bil,” said a source.

The outlook for oil prices has been mixed, with some predicting it would strengthen to US$65 per barrel in the next 18 months, while others foresee a new equilibrium at about US$50 per barrel.

In November last year when announcing Petronas’ third-quarter results, Petronas president and chief executive Tan Sri Shamsul Azhar Abbas had stated that the company would slash its yearly RM50bil capex by 15% to 20%.

Petronas, Malaysia’s only global Fortune 500 company, is the country’s biggest source of revenue, covering about a third of the Government’s annual income. But not unlike other oil majors, it has to face the new realities of bearish crude prices.

But Shamsul’s calls for a lesser payout has always met with resistance from the Government.

StarBiz had reported yesterday that Shamsul’s contract might be extended by another seven months, with an announcement on his successor to be made soon.

The succesors lined up are chief operating officer Datuk Wan Zulkiflee Wan Ariffin, senior vice-president of corporate strategy and risk Md Arif Mahmood, vice-president and chief executive of Petroleum Development and Production Datuk Mohd Anuar Taib and Datuk Ahmad Nizam Salleh, who is the chief executive of Petronas’ 80%-owned unit Engen Ltd based in Cape Town, South Africa.

Meanwhile, a Bernama report quoting an official from rating agency Moody’s Investors Service said Petronas’ credit profile remained untroubled compared to its peers despite an expected earnings decline by Asian oil and gas players in 2015. Moody’s pointed to Petronas’ large liquidity buffer and prudent capital management policies that give it the financial flexibility to weather the downturn caused by the oil slump.-The Star

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