Petronas Q3 profit up on unit IPOs

KUALA LUMPUR: Petroliam Nasional Bhd (Petronas) posted a RM10.1bil jump in net profit for its third quarter to RM23.7bil owing largely to proceeds from the listing of two subsidiaries on Bursa Malaysia but indicated high annual dividends to the Government will need to be cut in the future.



Trimming the enormous dividends it pays to the Government needs to be done as Petronas intends to bump up capital expenditure substantially to replace aging plant and machinery and to search for new oil reserves.

“We can't afford to maintain a high payout ratio,” said Petronas president and CEO Datuk Shamsul Azhar Abbas at a media briefing of the oil company's third quarter results. “We are not in the mood to borrow money to pay dividends to the Government.”


Petronas paid dividends of RM34.3bil for the period ended Dec 31, 2010, of which the Government received RM30bil. The RM30bil dividend payment to the Government has been a legacy amount by Petronas in recent years.

Shamsul said Petronas must invest around RM55bil annually or RM275bil over the next five years to maintain the integrity of its oil producing assets to at least maintain, if not grow, the current oil production rate in the country which year-to-date was 1.6 million barrels of oil equivalent. Petronas is expected to spend RM40bil on capex this fiscal year.

Indicating the seriousness of the situation, Petronas said production of oil and its equivalent for the third quarter was slightly lower than the same quarter last year and discovery of oil year-to-date was 46% lower than 2009 and the lowest levels since 2000.

The size of recent oil reserves was also 53% smaller than the 10-year average size.

“Despite exploration and production costs quadrupling, returns have halved over the last decade,” said Shamsul.

“Replenishing reserves has been challenging since the maturation of existing fields.”

He said if large investments were not spent on maintaining existing production assets, oil production would decline by 1% to 2% a year for the rest of the decade. Some older oil fields are depleting by 10% per annum.

Petronas said funding the increase in capex would largely come from operations and sustaining margins, which recently was at 40%, was important in funding a good portion of its future investments.

“Our gearing levels are good but that's not a ticket to go and borrow,” said executive vice-president for finance Datuk George Ratilal.

For the third quarter ended Dec 31, 2010, revenue rose to RM60bil from RM53.4bil in the same quarter in 2009 and Petronas booked RM9.3bil from the listing of Petronas Chemicals Group Bhd and Malaysia Marine and Heavy Engineering Holdings Bhd.

Stripping out proceeds from the sale of those shares, profit would have increased by RM849mil as the stronger ringgit against the dollar had negated the much higher selling price of crude oil and petroleum products for the quarter compared from a year ago.

For the nine months to Dec 31, Petronas recorded a 15.8% growth in revenue at RM175.6bil compared to RM151.6bil the previous corresponding period. Net profit rose 39.8% to RM50.2bil from RM35.9bil, but stripping out the gains from the two IPOs, net profit would have grown by RM5bil.

Petronas said higher costs such as steel and drilling rigs had also eaten into profits but Petronas, minus proceeds from the two IPOs, was expected to hit an earlier set pre-tax profit target of RM80bil for its current financial year.

While the high price of crude oil which is well above US$100 a barrel would boost profit, Petronas is worried about the destruction in demand and the slowdown in the global economy should such high prices persist.

Shamsul felt the price of crude oil should fundamentally hover between US$75 and US$78 a barrel.

With the era of easy oil over, Petronas will now look for new reserves at unconventional sources such as oil shales but will not overpay for such assets.

Shamsul said Petronas was looking at unconventional oil assets in China, Myanmar, Indonesia and Australia. It plans to sell unprofitable international assets.

Petronas also announced it will change its financial year to end-December after its current year ends on March 31. Its 2011 financial year would be nine months until Dec 31, 2011. The change of its fiscal year to a calendar year would improve efficiencies and align Petronas with global practices and statutory requirements in countries it operates in, said Shamsul.

Its listed subsidiaries on Bursa Malaysia also announced a similar change in their financial year-end.

By JAGDEV SINGH SIDHU
jagdev@thestar.com.my