PETALING JAYA: Petroliam Nasional Bhd’s (Petronas)’s operating cashflow could fall by as much as 40% year-on-year in 2016, according to Affin Hwang Investment Bank Bhd.
The research house said in a report that the national oil company’s core earnings fell 67% year-on-year in the fourth quarter of 2015, although this has not fully reflected the scale of decline in crude oil prices due to the time lag between benchmark prices and actual average selling prices.
“Our forecasts suggest Petronas’ operating cashflow could fall 40% year-on-year in 2016, which we think is the key reason behind its decision to cut spending by RM50bil from 2016 to 2019.
“This is negative for oil and gas (O&G) equipment and services (OES) players and those servicing exploration and development activities should be hit the hardest.”
Affin Hwang said Petronas’ revenue and earnings could fall further in the coming quarters, even if Brent crude prices stabilise at fourth-quarter levels.
Group revenue has fallen by 30% since the peak in the second quarter of 2014 (upstream by 31%), but this was mild in comparison to the 59% lower average Brent crude prices since then.
“This discrepancy between the Petronas’ topline (-30%) and benchmark prices (-59%) could not be explained by changes in production volume which had risen by only 5% during this period.
“And we doubt Petronas’ share of entitlement of its production would be significant enough to address this.”
The research house said there could be a time lag between Petronas’ product pricing and the benchmark crude prices.
“We understand this is the case for Petronas’ liquified natural gas (LNG) revenue (23% to 25% of O&G product sales), as LNG pricing is reportedly linked to crude prices with a six-month lag.
“If our hypothesis is proven true, Petronas’ revenue and earnings will likely fall further in the coming quarters, even if Brent crude prices remain flat at US$44 per barrel.”
Affin Hwang added that even players with firm contracts were unlikely to be spared the turmoil.
“The lopsided bargaining power of the oil majors as well as the difficulties in enforcing O&G contracts lead us to conclude that OES players will not be able to resist pressure to cut service rates.
“This is especially so in Malaysia, with Petronas being the largest customer in the country.”