IT was not how any new CEO would have liked to deliver a message in his first major media engagement but Petroliam Nasional Bhd (Petronas) president and CEO Tengku Mohammad Taufik Tengku Aziz knows these are not normal times for the under-pressure oil industry.
In announcing a huge loss of RM21bil for its second quarter financial results, Tengku Taufik signalled the bitter dose of reality that has set into the hugely important oil and gas industry.
“I would categorise this period as a great reset for our industry. The unprecedented and challenging market conditions have significantly impacted the industry and as you have seen just now, Petronas was not spared, ” he told the media yesterday when announcing its results.
Petronas’ losses were caused by huge impairments to its assets, indicating a deep-rooted set of problems that is not unique to it. Stripping out the RM20.8bil in impairments of its assets, Petronas would have posted a profit of RM7.7bil.
Hit by what it calls a “black swan event” in the pandemic and “grey rhino” in the collapse in demand, hints of the impending losses were there for all to see prior to yesterday and the Petronas announcement came as no surprise.
Major oil companies have been posting huge drops in profit, some making a big loss and even write downs on their assets. Much of that has been brought about by the changing market dynamics from the ongoing Covid-19 pandemic, which has cut demand for oil.
BP had its dividend slashed after posting a US$6.7bil loss in the second quarter and ExxonMobil reported another quarter loss of up to US$1.1bil. Shell’s second quarter profit plunged by 82% and ExxonMobil, once the world’s largest listed company, has been replaced as a component stock in the Dow Jones Industrial Average.
Saudi Aramco, the largest oil company in the world, announced that its profit had fallen by almost three quarters.
The problem is not new. Even prior to the Covid-19 pandemic, the world was already producing more oil than what was needed.
The gap between supply and demand, where variances can cause huge swings in crude oil prices, has failed to narrow even as production cuts were instituted by the large oil-producing countries.
Demand took a big hit from the lack of economic activity and the supply-demand gap widened. Demand has clawed back as economies recover but it was not what it used to be.
The writedowns by Petronas and the oil majors have huge implications for the oil and gas industry. With the national oil company on alert over the “new normal” for the oil and gas industry, more cuts in expenditure are to be expected.
Hit by falling prices in 2015, the situation is far worse than before. With massive and high-cost wells now onstream and a staple across the industry, the current low price environment some fear will be more permanent than temporary.
One way Petronas is looking to boost revenue from its existing business is to realise new top lines for its business.
“As the preferred LNG solutions partner, we are now dedicating efforts to penetrate emerging markets of South Asia and South-East Asia in establishing new LNG clients. Driven by our commitment in providing accessibility to our clients, we are providing new LNG outlets such as the virtual pipeline system and bunkering services by the end of the fourth quarter of 2020.
“The project delivery and technology business has also actively explored technology as a new revenue stream from the implementation of innovative business concepts supported by breakthrough technologies, ” he says.
What will Petronas do?
The write-downs indicate a structural issue that many producers see as a permanent predicament.
Assets bought when the price of crude oil was higher are not worth what they are today.
It would take something extraordinary to lift demand and consequently the price of crude oil and Petronas does not see that happening soon.
It believes the price of crude oil would be in the range of US$55-US$60 a barrel over the long-term as a result of the change in market dynamics we are seeing today.
“The days of oil and US$80 to US$100 a barrel are long gone, ” says Tengku Taufik.
Petronas sees oil and gas contributing 47% of energy demand in 2040 from 53% it was in 2018. Renewables are expected to contribute 24% of energy demand in 20 years from 10% two years ago.
And apart from cutting costs to deal with the tough demand conditions, oil companies will need to figure out ways of generating revenue from other sources and that is where Petronas is looking towards renewable energy.
“The first measured step that we are embarking on is to reshape our portfolio mix. The scope of this group-wide exercise would involve high-grading our portfolio to balance between sustainability and high-value returns to the company, ” he says.
“Reviewing our geographical revenue and profitability analysis across the globe must also be part of the scope. While Petronas’ portfolio positions us reasonably well to address the energy transition, it will need to be reassessed with regards to our liquids vs gas positioning.
“Even as we strongly advocate natural gas as the cleaner, more reliable and abundant energy source that could support the energy transition agenda, our pace in delivering liquids to market must be revisited. In the same vein, we will continue to grow our presence in the renewable energy space as part of our three-pronged growth strategy to step out into renewable energy and specialty chemicals, ” he says.
Petronas sees its renewable energy growing 10-fold to three gigawatts in four years and it will be an important cog of its business portfolio and revenue generator.
In its manufacturing portfolio, Petronas has a large and profitable petrochemicals business.
Petronas Gas reported higher revenue and profit for the second quarter ended June but that is thanks to higher prices in the regasification business.
Stable profits for its business meant it continued to pay a dividend to shareholders, but for the quarter, it also announced a large bump in its dividend to 66 sen a share from 16 sen a share. Maybe that foretelling of the cash demand requirements by its major shareholder. Petronas Chemicals Group Bhd (PetChem) is another avenue where it can use to generate more chemicals.
Although the world has found new ways of reducing its dependence on fossil fuels, the demand for petrochemicals will follow demographic and economic trends more robustly.
PetChem, which was not spared from the fall in crude oil prices as it translates to the final selling price of its product, is set to look at more specialty chemicals. It has entered into an agreement with LG to make the chemicals used in the manufacture of nitrile rubber gloves.
Such chemicals offer better margins than generic chemicals and the specific usage of specialty products from perfumes to rubber gloves will help cushion pressures in its traditional business segment. In fact, with refining margin hurt badly, Petronas will look to start refining more for petrochemicals instead of petrol and diesel.
Then there is the venture into renewable energy. Petronas has a solar farm in Gebeng and its acquisition of Amplus Solar in India gives it a footprint of 500MW in Malaysia and India.
Petronas aims to grow that business segment dramatically by bumping that generation capacity to three gigawatts by 2024. Preserving cash and cutting its dividend. Petronas now is looking at preserving its cash and maintaining its liquidity and has so far said capex has been cut by 21% and opex by 12% in the first half with further savings expected by the end of the year. Its cashflow from operating activities in the first half of 2020 was RM26.3bil from RM44.9bil in the same period last year.
“Protecting ourselves against future unpredictable shocks is the emphasis on focused execution at pace. Under this umbrella, we will, first and foremost, preserve cash and maintain liquidity which we have immediately embarked at the onset of the pandemic in March.
“As many major energy global players have started to reduce their investments in response to the low oil price and COVID 19 pandemic-induced demand destruction, our upstream business has also taken immediate steps to ensure it retains the financial strength to remain resilient.
“Cost optimisation efforts continues to be carried out via prioritisation of maintenance and turnaround activities as well as the adoption of new ways of working. This has led to more than 10% of reduction in unit production cost or UPC – absolutely critical if we are to navigate a US$40 per barrel scenario for the foreseeable future, ” says Tengku Taufik.
Keeping a tight hold on the purse strings of the company will mean that its dividend to the government will be up for discussion.He says the payment to the government will be determined by its financial performance this year but the government will be keen on seeing a return.
He says the dividend it pays the government will be governed by affordability, a term Tengku Taufik used often when addressing questions on dividend to the government. Petronas paid RM24bil in dividend to the government following its 2019 financial year where profit is going to be much higher than this year.–The Star