AMID soaring national debt level which has already hit 64.3% of gross domestic product (GDP) in 2Q 2021, PETRONAS’ almost three-fold net profit jump to RM48.6 bil (FY2020: net loss of RM21.03 bil) can indeed be a huge relief to Malaysia but with one condition.
Even as the national oil corporation has announced lower dividend of RM25 bil (FY2020: RM34 bil; FY2019: RM54 bil) in-line with its earlier guidance back in 2020 – but set against a spike in global oil prices with the Brent crude currently trading at a seven-year high of US$107/barrel – this must not be a signal for the Government to indulge in lavish spending.
Prudence and belt-tightening should remain the rule of the day especially with the world currently in a chaotic state and with tonnes of uncertainties abound.
To meet its RM25 bil dividend target, the remaining RM9 bil dividend it owed the Government was paid in 4Q 2021 (FY2021: RM25 biln) but PETRONAS’ net cash continued to strengthen (+5% quarter-on-quarter [qoq]) to RM67 bil, underpinned by stronger operating cash flow (+11% qoq).
Engulfed in geopolitical tension brought about by the Russia-Ukraine warfare is certainly a most untimely catastrophe given the world has yet to liberate itself from the COVID-19 health crisis which remains unabated even three years after its maiden outbreak.
Maintaining its oil price assumption of US$88-US$92/barrel (EIA: US$83/barrel), TA Securities Research expects the following drivers to sustain oil price strength in the short term:
- Worries of oil supply disruptions emanating from Russia’s invasion of Ukraine;
- Receding concerns that the COVID-19 Omicron variant will impact oil consumption;
- Shrinking inventories;
- Demand for oil as an alternative due to gas shortage in Europe; and
- OPEC+’s inability to increase production to fulfil set quotas.
On the other hand, factors that may cap oil price upside include:
- Potential return of 1.3 million barrels per day of Iranian crude supply after sanctions are lifted;
- Inflationary pressures may derail economic recovery and cause oil demand to collapse; and
- Rapid release of US strategic petroleum reserves (SPR) to cool-off prices in the wake of the Russia-Ukraine war.
“Nevertheless, over the medium term, we expect oil prices to soften in 2H 2021,” projected analyst Kylie Chan Sze Zan in an oil & gas (O&G) sector update. “This is underpinned by expectations of increased oil production from OPEC+ and the US that will lead to inventory build-ups.”
RHB Research who like TA Securities Research also reiterated its “overweight” outlook on the O&G sector noted that if PETRONAS were to spend RM20 bil capex annually for its upstream activities in 2022, this would point to a strong increase of 37% from FY2020’s RM14.6 bil.
“We believe the domestic upstream space will be the beneficiary if 60% of it is allocated to the domestic arm,” opined analyst Sean Lim. “Meanwhile, it was reported that PETRONAS will not be making any rushed decisions about its ongoing collaboration with Russian oil firm Gazprom in Iraq’s Badra oilfield.”
The research house is maintaining its 2022-2023F crude oil prices at US$75-US$90/barrel with “near-term oil prices – fuelled by the continuous heightened geopolitical tensions – could potentially hit US$110.00-US4120.00/barrel”. – March 2, 2022
