Petronas to relook at capital strategy as financing challenges and rising upstream costs converge

Tuesday 02 Jul 2024

KUALA LUMPUR (Aug 30): Difficulty in securing financing has prompted Petroliam Nasional Bhd (Petronas) to relook at its capital strategy, which includes having more cash buffers on hand to execute core oil and gas (O&G) projects that financial institutions increasingly shy away from.

At the same time, the company also requires funding to grow its renewable energy (RE) segment, which similarly has been difficult to secure, as they do not provide as high returns as the core hydrocarbon business, said Petronas president and group CEO Tan Sri Tengku Muhammad Taufik.

“Accessible capital to do what we need to do is constrained. We have to set aside buffers in our cash balance,” he said during the company’s financial results briefing on Wednesday.

“What [happened] has compelled [us] to relook at our capital strategy… It is becoming evidently clear that in order to address the headwinds in the short term and the structural changes of the long term, we must have more funds and liquidity available on hand.”

Muhammad Taufik gave an example of doubling the working capital requirement for one project for the extra buffer, pointing to how upstream activities costs have risen amid a heated market.

Petronas’ total group costs in 1HFY2023 rose 6% year on-year (y-o-y) to RM134.4 billion, from RM126.5 billion in 1HFY2022, as domestic group costs rose 11% to RM87.3 billion from RM78.6 billion.

Similarly, capital expenditure (capex) in the period rose 13% y-o-y to RM21.4 billion from RM18.9 billion, of which RM10.5 billion was for domestic capex covering both upstream and downstream, up nearly 50% from RM7.1 billion in 1HFY2022.

Group operating cash flow slipped 7% y-o-y to RM57.8 billion in 1HFY2023, from RM62.4 billion in 1HFY2022, in line with normalising oil and gas and product prices.

Cash and cash equivalents rose to RM217.59 billion at end-June 2023, from RM201.22 billion at end-December last year. The company has paid RM16 billion in dividends to the federal government, as part of its renewed commitment of RM40 billion dividend payout this year, from initial target of RM35 billion in the previous national budget.

“Not only are we seeing brakes in market fundamentals, we are also seeing a very heated market. Everyone within the upstream sector is scrambling not only for the people, but also vessels and equipment causing those escalations in prices, even as we pick up in activities.

“This has proven challenging; while we maintain our cost discipline, there is going to be a need to put in extra buffers, perhaps trying to double the amounts we had previously,” Muhammad Taufik said.

Edited ByS Kanagaraju

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