Impairment losses push Petronas into the red

-A +A

LAST fRIDAY, Petroliam Nasional Bhd (Petronas) announced its first loss since it started releasing its financials on a quarterly basis five years ago. It posted a net loss of RM7.3 billion on revenue of RM79.4 billion in its fourth quarter ended Dec 31, 2014.

The national oil company’s executives, however, were quick to point out that the loss was only for the quarter and not the full year. It achieved a net profit of RM47.6 billion on revenue of RM329.1 billion in FY2014. In contrast to FY2013, its after-tax profit plummeted 27% despite revenue inching up 4%.

The loss generally stemmed from tumbling oil prices, which were down from US$115 per barrel last June to around US$45 in January this year and are now at just above US$60 a barrel. Worse still, there were impairment losses of some RM22.6 billion.

Explains Petronas executive vice-president for finance Datuk George Ratilal, “We have to reassess the value of our assets, principally the oil and gas production assets. We wrote down the value of those assets as a charge to the profit and loss account.”

He says if Petronas adjusted its financials for the impairment losses, profit before tax would actually increase from RM99.9 billion in FY2013 to RM100.3 billion in FY2014 despite the lower oil prices.

“If oil prices remain where they are, we don’t see any impairment losses going forward … This would have been a great year had it not been for the impairment losses. Ebitda (earnings before interest, taxes, depreciation and amortisation) increased from RM123.4 billion to RM125.3 billion,” he adds.

Nevertheless, both Ratilal and Petronas outgoing president and CEO Tan Sri Shamsul Azhar Abbas reiterate that the days of US$100 per barrel oil are over. They paint a realistic picture of US$55 per barrel over the next couple of years, which could be taken to indicate that the go-go days are over, at least for the near term.

Petronas produced a record 2.2 million barrels of oil equivalent per day last year, up 5% from 2013. Likewise, entitlements were up 5% to 1.7 million barrels a day. However, there is the likelihood that the numbers could be adversely affected next year by cuts in capital expenditure.

The national oil company is cutting capex by 10% this year and 15% in 2016, which could be anywhere between RM20 billion and RM30 billion over the next couple of years. Shamsul explains, “Everything is going to be driven by economics.”

While investors are jittery about Petronas recording a quarterly loss, the oil company is paying RM26 billion in dividends to the government from its annual profit in FY2014.

While a breakdown of the figures is not available, some RM12.2 billion is stated as non-controlling interest or NCI dividends and RM2 billion as dividends to the government in 2014.

As at end-2014, Petronas’ asset base was 8.8% bigger at RM537.5 billion while its cash pile had shrunk 4.7% to RM136.2 billion. Gearing for the year in review fell to 9.4% from 11.1% at end-2013 while return on average capital employed dipped to 11.6% from 17% at end-2013.

Some 61% of Petronas’ RM64.6 billion capex in 2014 was spent locally in Malaysia.  

Shamsul sums things up by saying, “We are still reviewing our plans for the next two years to ensure that we remain conservative, prudent and robust, reflecting the due realities of the markets at this point in time.”

While speculation of a delay in the RM60 billion Refinery and Petrochemical Integrated Development (RAPID) in Johor beyond 2020 was quashed, market talk of the oil company shelving the development of oilfields via risk service contracts (RSCs) was confirmed.

“They (RSCs) can only work if oil is more than US$80 a barrel. Anything less than that and you are not going to see any award of small fields under the RSC concept,” Shamsul says.

Meanwhile, company executives say the second phase of Dialog Group Bhd’s Balai Cluster RSC has yet to be decided on. Such contracts are “always under review”, they note.

Other interesting takeaways include Petronas deferring the development of the Sepat oilfield to 2017 or 2018, and being in talks to dispose of an additional 10% to 12% of its Canadian outfit Progress Energy to a Chinese party, which would mean that the national oil company would trim its stake to 50%.

On Progress Energy, Shamsul says, “The cost we have spent is close to being fully recovered. But the good part is that almost all or close to 90% of the liquefied natural gas that is going to be produced by this plant is already sold — to the Indians, the Chinese and the Japanese.”

He adds that a dispute with the Canadian government has been resolved amicably with a final investment decision likely to be made towards the middle of the year.

On passing the baton to Datuk Wan Zulkiflee Wan Ariffin, who is currently the chief operating officer and executive vice-president of downstream business, Shamsul says, “He has always been a part of the succession plan, he is the right candidate to take over my place.”

Wan Zulkiflee takes the helm of Petronas come April.

This article first appeared in The Edge Malaysia Weekly, on March 2 - 8, 2015.