PETRONAS lost RM21 billion in the second quarter this year, its first red ink since the fourth quarter of 2015.
Responding swiftly, a top policymaker announced Putrajaya’s commitment to ensuring the national oil corporation returns to profitability although he acknowledged the turnaround will depend on global oil prices.
The key question is what Putrajaya can – or will – do to ensure Petronas is again profitable?
Meanwhile, several indicators suggest the path to profitability for Malaysia’s only Fortune 500 company could be delayed and possibly difficult.
Admittedly, Petronas can cut costs.
Although group costs rose to RM111.9 billion in the first half of 2020 (1H2020) from RM94.4 billion the same period the previous year, this isn’t the sole reason why the national oil company’s 17 successive quarters of black ink turned red.
Two bigger contributing factors were net impairment totalling RM20.8 billion and sharply lower average prices of Brent oil, the global benchmark. Brent oil nose-dived from US$66.02/barrel in 1H2019 to US$39.73/barrel in January-June this year.
For Petronas, one potential major saving is cutting dividends to its sole shareholder, the federal government.
Is Putrajaya willing to accept a markedly smaller dividend from Petronas?
Although oil and gas’ share of federal government revenue – including dividends from Petronas, petroleum income tax, export duties, royalties and exploration activities – has fallen from 41.3% in 2009, its contribution is still significant.
Oil and gas comprised 23.3% of federal government revenue in 2018, a bigger chunk of 30.5% in 2019 and an expected 20.6% this year, data from Kenanga Research shows.
Last year’s larger portion from oil and gas stemmed from Petronas’ dividends – more than doubling from RM26 billion in 2018 to RM54 billion in 2019.
Slashing dividends is the response adopted by two oil giants Shell and BP, formerly known as British Petroleum.
Shell’s net profit fell 46% to US$2.9 billion, prompting the oil major to slice by two-thirds its quarterly dividend from US$0.47 in 4Q 2019 to US$0.16 in 1Q2020.
Not only is this the first time in 80 years that Shell cut its dividends, it is also the first oil major to do this. After posting a US$16.8 billion loss in the April-June quarter this year, BP announced dividends would be halved.
The last time BP cut its dividends was in 2010 – the year the Deepwater Horizon oil spill in the Gulf of Mexico caused one of the worst US environmental disasters.
Another indicator Petronas’ return to profits may be deferred to a later date is Aramco’s decision to cut its October official selling price for Arab Light crude to Asia, the deepest monthly reduction since May this year.
Offering markedly lower prices to its biggest buyers suggests the Saudi oil giant sees oil demand is faltering.
Aramco may also be forced to do what was once unthinkable – abandon deals and sell assets, Julia Horowitz and John Defterios write in CNN.
Both writers suggest Aramco may call off already-announced ventures in India and China.
Although Aramco’s net profit plunged 73% to US$6.6 billion between April and June this year, reducing dividends isn’t an option.
During its initial public offering (IPO) in December last year, Aramco promised to pay US$75 billion in annual dividends – a pledge that helped the Saudi oil giant retain its US$1.9 trillion market valuation, the second highest after Apple.
A third indicator is whether oil demand peaked in 2019.
Although expert opinion is mixed, the consensus is oil demand will revert to the 2019 level after an effective Covid-19 vaccine is available globally. In its June report, the IMF expects the world economy to shrink 4.8% this year, the most severe contraction since the Great Depression. If IMF’s prediction materialises, oil demand could be impacted severely.
China’s record oil buying spree in past months may be coming to an end, Tsvetana Paraskova wrote in an Oilprice.com article.
Import data suggests Beijing bought oil after prices hit a near-20 year low in April this year.
Unusually-high imports in May and June suggest China has ample oil stocks.
A bigger, long-term factor is the accelerating switch out of oil and gas to clean, renewable energy.
Oil majors like BP are making a determined start.
In August this year, BP chief executive Bernard Looney announced a new road map: stop oil and gas exploration in new countries, slash oil and gas output by 40%, lower carbon emissions by about a third and boost capital spending on lower carbon energy tenfold to US$5 billion annually.
Investors increasingly favour companies involved in clean, renewable energy.
Oil giant Exxon Mobile’s market valuation of US$180 billion is not even two-thirds that of Tesla, Steven Mufson writes in Washington Post.
Tesla delivered 367,000 electric vehicles in 2019, a 50% jump from 2018.
Exxon’s diminishing market value suggests Petronas has bigger problems than returning to profitability.
Opinions expressed in this article are the personal views of the writer and should not be attributed to any organisation she is connected with. She can be contacted at email@example.com