KUALA LUMPUR: Petroliam Nasional Bhd’s (Petronas) weak first quarter results were expected and has revealed the difficulty the oil and gas industry is facing.
Maybank Investment Bank Research said Petronas’ results clearly expose the dire state of the industry -low oil price level, cost/ capex cuts, reduced activities, cancellations and deferments.
“However, the key positive from this is that Petronas is profitable at US$34 per barrel. We remain ‘neutral’ on the sector. A concerted cut in global oil production is key to a re-look of the sector.
“From the equity market’s perspective, volatility offers multiple trading cycles, especially on high-beta, beaten-down stocks. Our fundamental ‘buys’ are Yinson
, Bumi Armada, KNM, SapuraKencara and Dialog,” the research house said.
Petronas reported a 59% reduction in net profit to RM4.57bil for the first quarter ended March 31 compared with RM11.4bil a year ago, as the bottom line was impacted by lower crude oil prices.
The national oil company’s revenue similarly declined by 26% to RM49.13bil from RM66.19bil. Its gross profit for the quarter was halved to RM11.32bil compared with RM22bil a year ago.
Maybank said Petronas’ weaker results in the first quarter largely corresponded to the 37% fall in crude oil price of US$34 per barrel. It said this was offset by a 9% increase in production and favourable exchange rates.
Segment-wise, it said both the upstream and downstream businesses reported lower year-on-year earnings, down 71%/42% respectively, on lower prices (crude and LNG), sales volume (LNG) and margins (refining, marketing).
Its net cash level declined marginally to RM62bil as at March 31, 2016 while operating cashflow contracted by 44% year-on-year to RM10bil, which saw Pertonas plunging into a negative FCF level in first quarter.
“Petronas remains cautious on the outlook, on expectation of a prolonged low and volatile oil price environment. It is adopting lean management, aiming to reduce its capex/opex by RM15bil - RM20bil in FY16, which encompass 30%-40% of its targeted RM50bil capex/opex cut over the next four years (2016-2019).
“This will be undertaken via revision/negotiation of contracts and cost optimization efforts. Some capital projects may see delay in implementation as Petronas undertakes cashflow preservation/capital discipline/cost management,” Maybank said.
Maybank said Petronas may tap into the debt market. It said Petronas stressed that its operating cash flow was insufficient to cover its capex and dividend commitments to the Government, which was already apparent in this first quarter.
“For that, it does not rule out the possibility of tapping into the debt market and gearing up, if necessary, to fund its capex commitment. Recall that Petronas has committed to pay RM16bil in dividends in 2016, which is based on FY15 profits,” it added.
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