This article first appeared in The Edge Malaysia Weekly on August 30, 2021 - September 5, 2021

PETROLIAM Nasional Bhd (Petronas) returned to the black, chalking up a profit after tax (PAT) of RM18.9 billion in the six months ended June 30, 2021 (1HFY2021). In stark contrast, the national oil company suffered an after-tax loss of RM16.5 billion in the corresponding period last year.

The turnaround was due to the higher earnings before interest, taxes, depreciation and amortisation (Ebitda) it recorded in 1HFY2021, which at RM46 billion is 57% higher than the RM29.4 billion the group recorded in 1HFY2020.

The improvement in the financial results for 1HFY2021 was a much-welcomed respite for Petronas, considering the tough year it had in 2020.

Nevertheless, Petronas’ president and group CEO Tengku Muhammad Taufik cautioned that despite the perceived recovery in the oil and gas (O&G) sector, the outlook remains fragile.

“To a large extent, the oil market and price outlook depend substantially on the Opec+ coordination and management to stabilise the market. There is still the risk of non-Opec members flooding the market with inventory,” he said during the national oil company’s financial results announcement last Friday.

For 1HFY2021, Petronas posted a revenue of RM109.6 billion, a 17% increase year on year compared with the RM93.6 billion it recorded a year ago. The increase was attributed to favourable average realised prices for major products and higher sales volume, mainly for liquefied natural gas (LNG) and sales gas.

According to Muhammad Taufik, Brent crude oil in the first half averaged US$64.98 per barrel, compared with US$39.73 per barrel in the corresponding period last year, as the market was supported by active price management by Opec+ and a recovery in demand.

However, the outlook is far from rosy for O&G players. On Aug 12, the International Energy Agency (IEA) forecast that global oil demand in 2021 will be 96.4 million barrels per day (bpd), some 200,000 bpd lower than its previous forecast.

The projection for 2022 was also revised downwards to 99.3 million bpd from 99.5 million bpd. These movements reflect a growing uncertainty in demand following the drag caused by the Delta variant of Covid-19, as well as poorer prospects in the aviation and tourism industries, said Muhammad Taufik.

“Although refining of petroleum products has seen improving margins over the past six months after facing demand disruptions last year, uncertainties still remain. The aviation industry has not rebounded, registering over RM200 billion losses in revenue last year as a direct result of the pandemic.

“Since then, the transport segment has seen a gradual increase in activity in Europe and the US … China recently announced that the country is facing issues contending with the Delta variant, immediately denting demand in this segment,” said Muhammad Taufik.

In 1HFY2021, Petronas managed to reduce its group costs, including impairments, by 16% to RM94.2 billion, compared with RM111.9 billion a year ago.

Its cash flow from operating activities (CFFO) improved 24% to RM32.7 billion, compared with RM26.3 billion in 1HFY2020. As a result, its net cash position increased by a 14% quantum to RM59.6 billion, from RM52.1 billion in 1HFY2020.

In terms of its net cash position, Petronas stands out among its peers, which were still mostly in a net debt position as at June 30, 2021.

“Our continued efforts to preserve and strengthen liquidity has resulted in the delivery of a robust CFFO of RM32.7 billion, 24% higher than last year. This provides healthy liquidity cover for the group’s capital investments.

“In addition, we continue to be in a net cash position of RM59.6 billion, which differentiates us from our peers, a testimony to the group’s prudent cash management practice,” said Petronas’ group chief financial officer Liza Mustapha during the press briefing.

The group’s cash and fund investment balance as at June 30, 2021, stood at RM167 billion, an increase of 18% from RM141 billion as at Dec 31, 2020.

This increase was largely contributed by robust CFFO of RM32.7 billion, which in turn was able to support its capital investment of RM12.7 billion and dividend payments to the government to the tune of RM8 billion during the period in review.

Petronas’ increase in profits in 1HFY2021 has allowed the group to declare an additional RM7 billion in dividends to the federal government — its sole shareholder — this year, increasing its payout to RM25 billion. In 1HFY2021, Petronas paid RM8 billion in dividends to the federal government.

With regard to efficiency in cash generation, Petronas continues to lead its peers with a CFFO margin of 30% for the period and net cash position of RM59.6 billion.

Petronas’ profitability in 1HFY2021 could be seen across the board, in all its business segments, said Liza. Upstream business registered RM13 billion profit, a rebound from a loss of close to RM12 billion last year. This was primarily due to higher revenue and lower impairment losses on assets, negated by higher tax, product costs and cash payments, in line with higher prices.

Similarly, the gas and new energy (GNE) business registered a RM3.7 billion profit, as compared to a loss of RM6.3 billion in the previous corresponding period, mainly attributed to lower impairment losses on assets and lower operating expenditure, but partially offset by lower revenue.

Petronas’ downstream business also registered a profit of RM2.5 billion in 1HFY2021, against a loss of RM1.4 billion a year ago, owing to improved petrochemicals and refining margins. Upstream business contributed the most to the overall improvement in profitability for the group.

While the outlook for the O&G industry is still rather uncertain, Muhammad Taufik said Petronas remained resolute in delivering cost-effective solutions with a lower carbon footprint and in executing its three-pronged growth strategy.

“We continue to maximise our cash generators by protecting our assets, whether they be located domestically or overseas. The efficiency and profitability of these assets provides us with a solid base and produces the required monetary resources to fund our growth.

“We will continue to expand our core business to adjacent ­areas and we will consciously do so in a cost-efficient manner. The ventures we embark on in this category of our long-term strategy will become our new cash generators.”

Petronas will actively seek ways to enter new businesses beyond its O&G portfolio under its “stepping out” strategy, he said.

In doing so, the group will invest between 9% and 10% of its total capital expenditure into new energy businesses such as solar, speciality chemicals and hydrogen.

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