It has been close to a month since the landmark general election in Malaysia, which saw the ruling coalition swept out of the government for the first time in 61 years. In its place is a new coalition, led by none other than the fourth Prime Minister of Malaysia – now the seventh Prime Minister – Tun Mahathir Mohammad. The impact of the election is broad and seismic, and while the promises of clean governance and the abolition of money politics is significant, we are curious about the impact on one of the country’s corporate crown jewels – Petronas.
From the new government’s manifesto, there is already an immediate effect. Alongside weeding out corruption, Pakatan Harapan also promised to re-instate petrol and diesel retail subsidies. This – along with the abolition of the unpopular GST, which is now zerorised – were part of series of measures that were criticised as being a burden on the population. The new government seems to be adhering to its promises, and in response, Petronas Dagangan – Petronas’s public trading arm – saw its share price slip by nearly 5% on worries that the re-introduction of subsidies would impact the state firm’s financials, with weekly market-derived prices introduced in 2015. The re-introduction of subsidies does not directly impact Petronas, given that the previous subsidy structure in Malaysia places the burden on the federal budget, unlike in Indonesia, where Pertamina shoulders a direct burden. And even if it did, Petronas is on far better financial footing than Pertamina.
With crude prices currently far above the US$52/b budgeted for 2018, the revenue windfall will increase Petronas’ contributions to the federal budget naturally, which would temporarily mute the burden of the subsidies. In March, the Petronas announced that revenues rose almost 14% to 61.8 billion ringgit. The Petroleum Economist reports that “While chief executive Wan Zulkiflee Wan Ariffin has talked of the premature exuberance over the oil price recovery, he also said the company is in a stronger position to execute its long-term growth agenda and that it would explore new business areas, such as speciality chemicals and new energy. The purse strings have already been loosened, with capital forecast expenditure in 2018 of some 55bn ringgit, some 23% higher than last year.” Would future investment plans for Petronas be affected now with the re-introduction of subsidies? Seeming so, as it impact Petronas’s ability to re-build its coffers for future capex opportunities and research.
Tun Mahathir had also recently expressed concerns over the dominance of Chinese companies in the Malaysia economy, standing at 7% of total FDI in the country in 2017. Inflaming tensions could also bring risks to disputed claims over rich oil territories in the South China Sea, including fields new Sabah and Sarawak.
Would Petronas’s autonomy be eroded with the new Government in power? This seems unlikely, given that Petronas’ historic independence in terms of operations, as well as with former Petronas chairman Hassan Merican sitting on the newly appointed Council of Eminent Persons tasked with recommended federal policies for the new government. Petronas is already fairly well run with proper governance structures in place and the new government is unlikely to shake its precious boat.
However, with upstream production faltering in Peninsular Malaysia, Petronas has been depending on oil and gas volumes from East Malaysia to grow operations, including maintaining its status as the third largest exporter of LNG in the world. Part of the Pakatan's manifesto included returning state rights to Sabah and Sarawak eroded over the course of the years. This would include returning rights to manage oil and gas blocks to both states, which has already begun in Sarawak where a state oil company has been formed. This would blunt Petronas’ grip over upstream production in East Malaysia – though it will remain a partner in most projects, its share or management of blocks would be reduced. Sabah fell in the election and with a state-focused new coalition government there, the demands for autonomy will increase. It’s something that Petronas should have no problem adapting to, given its vast reserves from international investments, but would have rather wished that it didn’t happen at all.
Something interesting to share?
Join NrgEdge and create your own NrgBuzz today
Headline crude prices for the week beginning 11 February 2019 – Brent: US$61/b; WTI: US$52/b
Headlines of the week
Midstream & Downstream
Global liquid fuels
Electricity, coal, renewables, and emissions
2018 was a year that started with crude prices at US$62/b and ended at US$46/b. In between those two points, prices had gently risen up to peak of US$80/b as the oil world worried about the impact of new American sanctions on Iran in September before crashing down in the last two months on a rising tide of American production. What did that mean for the financial health of the industry over the last quarter and last year?
Nothing negative, it appears. With the last of the financial results from supermajors released, the world’s largest oil firms reported strong profits for Q418 and blockbuster profits for the full year 2018. Despite the blip in prices, the efforts of the supermajors – along with the rest of the industry – to keep costs in check after being burnt by the 2015 crash has paid off.
ExxonMobil, for example, may have missed analyst expectations for 4Q18 revenue at US$71.9 billion, but reported a better-than-expected net profit of US$6 billion. The latter was down 28% y-o-y, but the Q417 figure included a one-off benefit related to then-implemented US tax reform. Full year net profit was even better – up 5.7% to US$20.8 billion as upstream production rose to 4.01 mmboe/d – allowing ExxonMobil to come close to reclaiming its title of the world’s most profitable oil company.
But for now, that title is still held by Shell, which managed to eclipse ExxonMobil with full year net profits of US$21.4 billion. That’s the best annual results for the Anglo-Dutch firm since 2014; product of the deep and painful cost-cutting measures implemented after. Shell’s gamble in purchasing the BG Group for US$53 billion – which sparked a spat of asset sales to pare down debt – has paid off, with contributions from LNG trading named as a strong contributor to financial performance. Shell’s upstream output for 2018 came in at 3.78 mmb/d and the company is also looking to follow in the footsteps of ExxonMobil, Chevron and BP in the Permian, where it admits its footprint is currently ‘a bit small’.
Shell’s fellow British firm BP also reported its highest profits since 2014, doubling its net profits for the full year 2018 on a 65% jump in 4Q18 profits. It completes a long recovery for the firm, which has struggled since the Deepwater Horizon disaster in 2010, allowing it to focus on the future – specifically US shale through the recent US$10.5 billion purchase of BHP’s Permian assets. Chevron, too, is focusing on onshore shale, as surging Permian output drove full year net profit up by 60.8% and 4Q18 net profit up by 19.9%. Chevron is also increasingly focusing on vertical integration again – to capture the full value of surging Texas crude by expanding its refining facilities in Texas, just as ExxonMobil is doing in Beaumont. French major Total’s figures may have been less impressive in percentage terms – but that it is coming from a higher 2017 base, when it outperformed its bigger supermajor cousins.
So, despite the year ending with crude prices in the doldrums, 2018 seems to be proof of Big Oil’s ability to better weather price downturns after years of discipline. Some of the control is loosening – major upstream investments have either been sanctioned or planned since 2018 – but there is still enough restraint left over to keep the oil industry in the black when trends turn sour.
Supermajor Net Profits for 4Q18 and 2018
- 4Q18 – Net profit US$6 billion (-28%);
- 2018 – Net profit US$20.8 (+5.7%)
- 4Q18 – Net profit US$5.69 billion (+32.3%);
- 2018 – Net profit US$21.4 billion (+36%)
- 4Q18 – Net profit US$3.73 billion (+19.9%);
- 2018 – Net profit US$14.8 billion (+60.8%)
- 4Q18 – Net profit US$3.48 billion (+65%);
- 2018 - Net profit US$12.7 billion (+105%)
- 4Q18 – Net profit US$3.88 billion (+16%);
- 2018 - Net profit US$13.6 billion (+28%)