Mixed views on Petronas capex allocation

Will Petronas’ improving results translate into more spending and job awards to benefit domestic oil and gas companies?

Salient points
• Petronas records another strong quarter on stronger oil prices
• Analysts are mixed on whether this means increased capex spending and activities
• Outlook for crude oil prices remains uncertain due to risks on demand aswell as supply

OIL giant Petroliam Nasional Bhd (Petronas) recorded yet another strong set of results in the third quarter, with profit after tax (PAT) surging 64% to RM10bil.

The stellar performance followed a more than a four-fold jump in PAT to RM7bil in the second quarter, and an over 100% surge in net profit in the first quarter ended March 31, 2017, due mainly to recovering oil prices and efficiency improvements by the company.

So far, it has been a good year for the Malaysian oil giant.

The company is optimistic about its prospects as well, having said that it expects to record stronger results for the full-year, compared to the previous year.

In a statement to announce its third quarter results, Petronas president and group chief executive officer Tan Sri Wan Zulkiflee Wan Ariffin (pic) said the group will continue its efforts to improve operational efficiency and its focus on its transformation initiatives, although crude oil prices were recovering.

While keeping costs down and improving efficiency may be factors within Petronas’ control, how oil prices will fare moving forward is anyone’s guess.

The price of Brent futures, the global benchmark, has risen by close to 33% since July this year to breach the key psychological mark of US$60 per barrel.

Moving forward, the question is whether Petronas’ improving results will translate into more spending and job awards to benefit domestic oil and gas players.

In the third quarter, Petronas capex spending increased 32% to RM12bil quarter on quarter, mostly driven by its Refinery and Petrochemical Integrated Development (Rapid) project in Pengerang.

Analysts seem quite divided in their opinions on this.

Maybank Investment Bank Research is among those with a more positive outlook on oil prices and the industry, having raised its 2017-2018 crude oil average selling price forecasts to US$54/bbl and US$60/bbl.

On the domestic front, it also expect a revival of new awards from Petronas by the first quarter of 2018, with local oil and gas players Yinson, Dialog, Wah Seong and Sapura Energy among its key “buy” calls.

It notes that the rising capex trend globally is a positive sign for the industry.

“Operationally, we expect O&G activities in Malaysia to pick up in 2018, as Petronas is expected to announce several major services awards, in the areas of offshore support vessels and fabrication,” it says.

The outcome of the Organisation of Petroleum Exporting Countries’ (Opec) meeting this month, it adds, will be closely monitored in shaping expectations for the direction of oil prices and Petronas’ capex spending for 2018.

Opec, supported by Russia, is widely expected to extend production cuts during the meeting next week. AmInvestment Bank, on the other hand, is not as bullish about the industry’s prospects.

It notes that Petronas’ capex spending for the first nine months of RM33.8bil accounts for only 56% of its earlier guidance of RM60bil for this year.

Hence, it says, it is likely that the group’s capex for the year will not be significantly higher than in FY16.

It also does not expect any further significant uptrend in crude oil prices, given the persistent supply-demand imbalance.

The research house maintained its 2017-2018 projection at US$50 to US$55 per barrel.

“We do not expect any significant change in Petronas’ cautious approach to upstream exploration and development expenditures.

“For Malaysian operators, which operate wholly offshore, these weak capex rollout prospects forebode that the worst can stretch for quite a while for those struggling with high gearing such as Bumi Armada, Alam Maritim and UMW Oil & Gas,” it cautions.

Its top picks are companies with stable and recurring earnings such as Dialog Group and Yinson Holdings.

Looking purely at the outlook for crude oil prices, the oversupply situation that has kept prices down is not likely to improve any time soon.

While Opec continues to attempt to cut supply, US crude oil production is stubbornly on the rise, up 10% since the beginning of the year to 9.7 million barrels per day.

The rig count added 25 rigs or 3% since the end of October, 2017, to 923 rigs.

On the demand side, there is the shift towards gas and other energy alternatives together with fuel-efficient hybrid automobiles, and several governments, including the UK, France and China having outlined plans to ban petrol vehicles by 2030, impacting the demand for crude oil.

The US Energy Information Administration (IEA) has cut its forecast for demand growth by 100,000 barrels per day (bpd) for this year and next, to about 1.5 million bpd and 1.3 million bpd in in 2017 and 2018 respectively.

This is in contrast to the view of Opec that 2018 will see a strong rise in demand.

Back to Petronas, its spending focus is expected to remain on the downstream segment, with its massive Pengerang Integrated Complex (PIC) having achieved 81% completion as at November 2017, and remains on track to achieve ready for start-up status in 2019.

Last month, BMI Research, which is a unit of Fitch Group, said Petronas’ is likely to focus its capital spending on higher priority downstream projects in the domestic market, including the PIC.

“These projects are closely aligned with Petronas’ long term strategy to move up the downstream value chain and will significantly improve Malaysia’s self-sufficiency in refined fuels and petrochemicals over the coming years,” it said.

It said Petronas’ overall appetite for overseas investments will remain subdued over the coming years in view of weak oil prices, its continued focus on spending cuts and the need to advance higher-priority projects at home.