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It was not the way any new CEO would have liked to convey a message on his first major media engagement, but Petroliam Nasional Bhd (Petronas) Chairman and CEO Tengku Mohammad Taufik Tengku Aziz knows these are not times. normal for the oil industry under pressure.
In announcing a large loss of RM21bil from its second quarter financial results, Tengku Taufik pointed to the bitter dose of reality that has settled on the hugely important oil and gas industry.
“I would classify this period as a great restart for our industry. The challenging and unprecedented market conditions have significantly impacted the industry and as you have just seen, Petronas was not spared, ”he told the media yesterday when announcing his results.
Petronas’ losses were caused by huge asset impairments, indicating a set of deep-seated problems that are not unique to it. Without counting the 20.8 billion ringgit in impairment of its assets, Petronas would have recorded a profit of 7.7 billion ringgit.
Struck by what it calls a “black swan event” in the pandemic and a “gray rhino” in the collapse of demand, the signs of impending losses were there for all to see before yesterday and the Petronas announcement was not. a surprise.
The major oil companies have been seeing huge declines in profits, some with huge losses and even write-offs of their assets. Much of that has been brought on by the changing market dynamics of the current Covid-19 pandemic, which has reduced demand for oil.
BP saw its dividend cut after posting a loss of $ 6.7 billion in the second quarter and ExxonMobil reported another quarterly loss of up to $ 1.1 billion. Shell’s second-quarter earnings plummeted 82% and ExxonMobil, once the world’s largest publicly traded company, has been replaced as a component stock in the Dow Jones Industrial Average.
Saudi Aramco, the world’s largest oil company, announced that its profits had fallen by almost three-quarters.
The problem is not new. Even before the Covid-19 pandemic, the world was already producing more oil than necessary.
The gap between supply and demand, where swings can cause large swings in crude oil prices, has not narrowed even as the big oil-producing countries instituted production cuts.
Demand was greatly affected by the lack of economic activity and the gap between supply and demand widened. Demand has picked up as economies rebounded, but it wasn’t what it used to be.
The write-offs from Petronas and Big Oil have huge implications for the oil and gas industry. With the national oil company on alert about the “new normal” for the oil and gas industry, further cuts in spending are expected.
Hit by falling prices in 2015, the situation is much worse than before. With massive, high-cost wells now in operation and an industry-wide staple, some fear the current low-price environment is more permanent than temporary.
One of the ways Petronas is looking to boost revenue from its current business is to bring in new lines of business for its business.
“As a preferred partner for LNG solutions, we are now dedicating efforts to penetrate the emerging markets of South Asia and Southeast Asia to establish new LNG customers. Driven by our commitment to provide accessibility to our customers, we are bringing new LNG outlets such as the virtual pipeline system and fueling services by the end of the fourth quarter of 2020.
“The technology and project delivery business has also actively explored technology as a new source of revenue from the implementation of innovative business concepts supported by innovative technologies,” he says.
What will Petronas do?
Write-offs indicate a structural problem that many producers see as a permanent situation.
Assets bought when the price of crude oil was higher are not worth what they are worth today.
It would take something extraordinary to raise demand and consequently the price of crude and Petronas doesn’t see that happening anytime soon.
He believes that the price of crude would be in the range of US $ 55 to US $ 60 a barrel in the long term as a result of the change in market dynamics that we are seeing today.
“The days of oil and $ 80 to $ 100 a barrel are behind us,” says Tengku Taufik.
Petronas expects oil and gas to contribute 47% of energy demand in 2040 compared to 53% in 2018. Renewables are expected to contribute 24% of energy demand in 20 years compared to 10% two years ago.
And in addition to cutting costs to cope with tough demand conditions, oil companies will have to find ways to generate revenue from other sources, and that’s where Petronas is looking to renewables.
“The first measured step we are embarking on is reshaping our portfolio mix. The scope of this exercise for the entire group would imply qualifying our portfolio as highly rated to balance sustainability and high-value returns for the company, ”he says.
“Reviewing our worldwide geographic revenue and profitability analysis should 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 respect to our liquid versus gas positioning.
“While we strongly advocate for natural gas as the cleanest, most reliable, and most abundant energy source that could support the energy transition agenda, our pace in delivering liquids to the market needs to be reviewed. Along the same lines, we will continue to increase our presence in the renewable energy space as part of our three-pronged growth strategy to take a step towards renewable energy and specialty chemicals, ”he says.
Petronas anticipates that its renewable energy will multiply ten to three gigawatts in four years and will be an important piece of its business portfolio and revenue generator.
Petrochemicals
In its manufacturing portfolio, Petronas has a large and profitable petrochemical business.
Petronas Gas reported higher revenues and profits for the second quarter ended in June, but that is due to higher prices in the regasification business.
The stable earnings for his business meant that he continued to pay a dividend to shareholders, but for the quarter, he also announced a big increase in his dividend to 66 sen / share from 16 sen / share. Perhaps that prediction of cash demand requirements from your major shareholder. Petronas Chemicals Group Bhd
(PetChem) is another avenue you can use to generate more chemicals.
Although the world has found new ways to reduce its dependence on fossil fuels, the demand for petrochemicals will follow demographic and economic trends more robustly.
PetChem, which was not spared from the drop in crude oil prices as it translates into the final sale price of its product, is prepared to look for more specialty chemicals. It has reached an agreement with LG to manufacture the chemicals used in the manufacture of nitrile rubber gloves.
These chemicals offer better margins than generic chemicals and the specific use of specialty products, from perfumes to rubber gloves, will help cushion the pressures in your traditional business segment. In fact, with the refining margin badly hit, Petronas will look to start refining more for petrochemicals instead of gasoline and diesel.
Then there is the commitment to renewable energy. Petronas has a solar farm in Gebeng and its acquisition of Amplus Solar in India gives it a 500MW footprint in Malaysia and India.
Petronas aims to grow that business segment dramatically by increasing that generation capacity to three gigawatts by 2024. By preserving cash and cutting its dividend. Petronas is now looking to preserve its cash and maintain its liquidity and has so far said that capex has been reduced by 21% and opex by 12% in the first half with more savings expected by the end of the year. Its cash flow from operating activities in the first half of 2020 was RM26.3 billion from RM44.9 billion in the same period last year.
“Protecting ourselves against future unpredictable shocks is the emphasis on rhythm-focused execution. Under this umbrella, first of all, we will preserve cash and maintain liquidity that we started immediately at the start of the pandemic in March.
“As many of the world’s major energy players have begun to reduce their investments in response to low oil prices and the destruction of demand induced by the COVID 19 pandemic, our upstream business has also taken immediate steps to ensure that retain financial strength to remain resilient.
“Cost optimization efforts continue to be carried out by prioritizing maintenance and recovery activities, as well as adopting new ways of working. This has led to more than 10% reduction in unit cost of production or UPC , absolutely critical if we want to navigate a scenario of US $ 40 a barrel for the foreseeable future, ”says Tengku Taufik.
Keeping tight control over the company’s finances will mean that its dividend to the government will be up for discussion. He says that the payment to the government will be determined by its financial performance this year, but the government will be interested in seeing a return.
He says the dividend he pays to the government will be governed by affordability, a term that Tengku Taufik often used when addressing questions about dividends to the government. Petronas paid out $ 24 billion in dividends to the government after its 2019 financial year, where profits will be much higher than this year.
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