BEING independent without having to depend on others for financial shoulders is perhaps the best business strategy around.
But this is too ideal a scenario in today’s complex business world; businesses cannot exist in a vacuum – small businesses need bigger businesses to thrive or to more bluntly put it, to ensure their very survival.
Such is the predicament encountered by numerous oil & gas (O&G) industry players who are over-reliant on the national oil corporation a.k.a Petronas which itself is juggling between maintaining a healthy profit margin and social obligation to the government of the day.
To re-cap Petronas recorded a 3Q FY2020 core profit of RM1.5 bil (quarter-on-quarter: -RM700 mil; year-on-year (yoy): -84%), thus bringing its 9M FY2020 core profit to RM9.3 bil (-76% yoy) on lower demand and price of crude oil and liquefied natural gas.
Despite its significantly weaker results and volatile market environment, Petronas has declared a dividend of RM10 bil in 3Q FY2020, bringing its 9M FY2020 dividends to RM26 bil (-43% yoy) from RM46 bil in 9M FY2020.
Hong Leong Investment Bank Research described such move as quite strenuous for its cash flow given its cash dividends declined by RM20 bil yoy while its core net profit has declined by RM29.3 bil yoy.
Above all else, Petronas’ net cash balance has also declined by RM65.2 bil yoy to RM18.2 bil (-72% qoq, -78% yoy), signifying its weakening financial position due to weaker overall sales volumes and prices.
“Its 9M FY2020 operating cash flow of RM32.6 bil (-42% yoy) is still at its weakest level in more than five years,” analyst Low Jin Wu pointed out.
“We believe that Petronas would try to partially recoup some declines in its operating cash flow in FY2021 by cutting capex despite the recent bullishness in oil prices.”
Low further projected that oil prices would need to stabilise above US$55 for a year at least in order for Petronas to consider elevating its capex spending above its pre-COVID-19 levels of circa RM50 bil.
Petronas’ 3Q FY2020 capex spending of RM7.8 bil (+25% qoq; -31% yoy) brought its 9M FY2020 capex spending to RM22.5 bil (-17% yoy) and constituted just 57% of its planned capex spending of circa RM40 bil in FY2020.
At such rate, Petronas will fall short of its RM40 bil initial planned capex for FY2020 due to significantly weaker operating cash flow despite the recovery in crude oil prices.
Recall that Petronas’ has pledged to cut about 21% of its capex and 12% of its opex spending for FY2020 due to the COVID-19 pandemic outbreak.
The moral of the story insofar as Petronas-dependent O&G companies are concerned is that while the fundamentals of the O&G sector is becoming more positive, the lowering of capex spending by Petronas maybe inevitable going in FY2021 (and beyond) given the oil corporation’s weakening financial position from the COVID-19 pandemic and its dividend commitments.
“We believe that Petronas’ lower capex spending would continue to plague upstream services players, particularly companies involved in exploration activities,” cautioned Low.
Although Petronas is likely to spend more on its capex at higher oil prices, he opined that Petronas would choose to be more prudent based on its current financial position.
Despite being in a recovery trajectory, Kenanga Research analyst Steven Gan, too, reckoned that the pace of recovery is expected to be largely be slow and gradual as fundamentals of the sector are still weak.
“As such, we do not expect to see activity levels returning to 2019-level at least until 2023,” he added. – Nov 30, 2020
