Petronas cost-cutting efforts yielding results

PETALING JAYA: Petroliam Nasional Bhd’s (Petronas) 6.7% decline in its earnings before interest, tax, depreciation and amortisation (ebitda) to RM70.4 billion for 2016 compared to 2015 is modest relative to the decline in oil prices, thanks to the oil major’s cost optimisation initiatives.

“This is a modest earnings decline, considering that the crude oil prices have decreased by around 17% year-on-year, with Brent averaging US$43.69 per barrel (bbl) in 2016, as compared with US$52.46 per bbl in 2015,” Moody’s said in a report yesterday.

Petronas’ upstream earnings for 2016, measured by profit after tax, improved by 88%, mainly due to operating costs reduction and lower impairment losses, compared to the prior year.

The company’s crude oil and natural gas entitlement volumes increased by 10.5% to 1,794 barrels of oil equivalent per day (boed), supporting the topline.

“We expect the LNG earnings contribution to increase with the company’s ninth natural gas liquefaction train (Train 9) already becoming operational in early 2017. The train has an additional annual LNG capacity of 3.6 million tonnes per annum (mmtpa), around 12% of Petronas’ current annual LNG sales volume.

“Assuming full capacity utilisation in 2017 and an average LNG selling price of US$6.00-7.50 (RM26.70-33.40) `per million British thermal units (MMBtu), the company’s topline for 2017 will increase by 2.3%-2.8%,” said Moody’s.

Meanwhile, downstream earnings have remained stable, with profit after tax amounting to RM8.3 billion. Refinery plant utilisation improved substantially to around 90% in 2016. Petrochemicals sales volumes have increased by 14% in 2016 on the back of exceptional plant utilisation of 96%.

“We expect the petrochemicals earnings to improve further next year with additional urea capacity being introduced in Sabah Ammonia Urea (Samur) in March 2017 and an aroma plant commencing its operations later during 2017,” said Moody’s.

Petronas’ capital investments in 2016 were mainly attributable to the company’s downstream operations – the Refinery and Petrochemical Integrated Development (Rapid) and Samur projects – and amounted to around RM50 billion, a 22% decline from 2015 level.

“With a US$7 billion equity injection by Saudi Arabian Oil Company for a 50% stake in Rapid, we estimate Petronas’ capital outlay for the project, which requires resources of US$27 billion, to decline significantly and will conserve cash.”

Moody’s expects reduced capital spending for the Rapid project and stronger cash flow contribution from its upstream segment on the back of firmer crude prices in 2017, to enable Petronas to maintain its net cash position in 2017.

As of Dec 31, Petronas reported cash and cash equivalents of RM121.5 billion. Borrowings amounted to RM67.6 billion.