A clearer picture will emerge on the impact that the almost 50% drop in the price of crude oil over the last six months has had on the coffers of the Federal Government when Petroliam Nasional Bhd (Petronas) unveils its next quarterly results.
Everybody knows that Petronas is not going to show a sterling set of numbers.
When Petronas released its third-quarter results on Nov 28, 2014, it had already sent a clear message that the final quarter would be bad.
The question is: How bad will it be?
Nobody had expected global oil prices to deteriorate so fast. The speed at which the oil price has fallen since the end of November has left even the most optimistic of oil companies dumbfounded.
It is almost a given that the national oil company will release a sober set of results, pushing firms still hoping for attractive contracts from Petronas into reality.
If reports of Petronas sending out an internal memo to cut operating expenditure by up to 30% this year are true, then this means the national oil company has started the ball rolling.
Financial numbers do not lie. They provide credible insight into the present and some understanding of the future.
Petronas president and chief executive Tan Sri Shamsul Azhar Abbas best summarised the correlation between the drop in global crude oil prices and Petronas’ bottom line. He has said that as a rule of thumb, for every US$1 drop in crude, the impact to Petronas’ income statement is estimated at RM1bil.
In the third quarter between July and end-September, the average price of Brent Crude for Petronas was US$101.85.
Based on that price, Petronas had recorded a pre-tax profit of RM22.8bil on a revenue of RM80.4bil.
Since then, the global crude oil situation has deteriorated significantly.
To get an idea of how fast the tables have turned, one just needs to look at the speed of prices dropping. On the last day of the third quarter last year, which is Sept 30, the price of Brent Crude was at US$94.17. By the time Petronas released its third-quarter results on Nov 28 last year, the price was already down to US$70.69 per barrel.
And on the last day of the year on Dec 31, it was further down to US$57.33 per barrel.
The average price of Brent Crude in the final quarter of 2014, according to data, was US$77 per barrel.
Assuming the average price of Brent Crude for the third quarter was US$77 per barrel, that would mean a difference of about US$25 between the third and fourth quarters.
If Shamsul’s rule-of-thumb guide on the correlation between falling oil prices and the impact on Petronas’ bottom line is to be taken as a yardstick, then we are looking at a significant impact to the income statement in the final quarter alone.
Until end-September 2014, Petronas had registered a pre-tax profit of RM78bil on a turnover of RM249.8bil. It had a cash balance of RM140.6bil as at end-September. So, the national oil corporation is sitting on a healthy balance sheet.
But everything points towards tough times in the next few quarters, which is why the organisation itself is cutting down on its capital and operating expenditure.
The RM78bil in pre-tax profit that Petronas had earned in the first three quarters of 2014 is enough to cushion the setback in the fourth quarter.
But come 2015, if oil continues to trade below US$60 per barrel, Petronas will be forced to continue with its aggressive cuts, unless the management is able to bring down cost quickly, and this is what Petronas is trying to do.
For starters, Petronas has already said that at current levels, the development of marginal oil fields would no longer be viable.
Whether this will impact the existing risk service contracts with companies awarded marginal oil fields is left to be seen.
At least one company with an enhanced oil recovery contract from Petronas has already indicated that it would stop operations of producing oil from an old field when the charter contract on a rig ends in a few months.
The weakening ringgit against the greenback will be a mitigating factor to Petronas’ bottom line because its sales are in US dollars.
However, this is not enough to overcome the impact due to the falling oil prices on the bottom line.
The ringgit has depreciated by less than 12% against the US dollar over the last six months, while the average price of crude is down by almost 50%.
As at end-November, Shamsul had predicted Brent Crude to stabilise between US$70 and US$75 per barrel. At the upper limit of US$75, Petronas’ payout to the Government in the form of dividends, taxes and royalties would be RM43bil.
But now, it would appear that the best-case scenario for Brent Crude next year is US$75 and not many are betting on that price.
The domestic oil service providers have stopped forecasting the price, while global oil majors have not discounted US$60 or below as the average.
So, even a prospective payout of RM43bil to the Government this year is looking rather shaky.
Previously, Petronas’ quarterly results used to be a mundane affair. But surely, it is not going to be the same this year, as all eyes will be on how low its profits have dipped.