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Analysis: Malaysia's Petronas gears up for new investment cycle

Highlights

RAPID refinery completion will free MYR15-20 billion/year capex

Oil price rebound allows Petronas to start new investment cycle

Petronas spends MYR30 billion/year just to maintain reserves

Singapore — Malaysia's national oil company Petronas is poised for its next wave of investments, in line with the recent final investment decision on the LNG Canada project, as the completion of its RAPID refinery frees capex and higher oil prices boost cash flows.

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With the 300,000 b/d RAPID project starting in early 2019, not only is MYR15-20 billion ($3.6-4.8 billion) in annual capex freed up, but Petronas has also received nearly MYR29.5 billion following the transaction with Saudi Aramco earlier this year, when the Middle Eastern oil producer joined the downstream project.

The additional cash gives Petronas further financial flexibility to either increase reserves or undertake longer-term projects like LNG Canada, according to Xavier Jean, senior director of corporate ratings at S&P Global Ratings.

This is a big shift from mid-2017, when oil prices were hovering around $50/b and the company was forced to shelve its Pacific NorthWest LNG project at Port Edward in British Columbia, Canada, citing "changes in market conditions."

At the time, Petronas' capex commitments were spread thin between maintaining the size of its petroleum reserves, downstream investments at the Pengerang RAPID refinery, dividend payments to the government and potentially high capex LNG projects in North America.

Petronas was in fact digging into its cash pile in order to finance an elevated capital spending plan and steady dividend distributions.

S&P Global Ratings estimated that Petronas' spending on investments (mostly on its RAPID project and reserve replacement) and dividends exceeded the cash generated from its operations by nearly MYR27 billion ($6.5 billion) for the fiscal year ended December 31, 2015, and by almost MYR17 billion for the year to December 31, 2016.

The state-run oil company needs to spend approximately MYR30 billion annually just to maintain its reserve life, Jean said.

Given its conservative financial policies and balance sheet management strategy, it's no surprise why Petronas decided to call off the Pacific NorthWest LNG project that would have been difficult to finance without depleting cash reserves further.

But by the end of 2017, Brent crude prices had bounced back to $67/b and along with it, Petronas' cash flows had strengthened.

Petronas' annual capital spending is estimated to average MYR50 billion-MYR55 billion in 2018, 2019, and 2020, with spending geared toward completing downstream projects in 2018, and focused on growing reserves in 2019 and 2020, according to S&P Global Ratings.

Petronas didn't respond to queries seeking comment on its capex spending.

NEW UPSTREAM INVESTMENT CYCLE

In May 2018, Petronas surprised the market with the acquisition of a 25% stake in the LNG Canada project, which went on to reach a final investment decision earlier this week, for two trains with a capacity of 14 million mt/year.

The investment was suitable given Petronas' declining domestic oil and gas production.

Petronas' focus on resources and production in Malaysia, where more than half of its resources are located, is a relative weakness for its earnings quality compared with larger and more geographically diversified peers like Norway's Equinor, Italy's Eni SpA and China's CNOOC Ltd, S&P Global Ratings said.

LNG Canada also allowed Petronas to exploit its acreage in the Western Canada Sedimentary Basin, first acquired through an investment in Calgary-based Progress Energy Resources in 2011, meant to develop the Montney shale gas assets in British Columbia.

Petronas holds an estimated 52 Tcf of resources in its North Montney acreage, making Canada the second-largest resource holder in its portfolio after Malaysia, according to Wood Mackenzie.

It expects Petronas' share of capex in LNG Canada at $5 billion between 2018 and 2023 until the first LNG cargo is shipped, including spending on Montney feedgas exploitation. In addition to natural gas, Montney also yields 10-20% natural gas liquids that will boost returns.

Lastly, LNG Canada will add North American gas diversification to Petronas' LNG portfolio that already comprises Malaysian LNG, Australian LNG from Gladstone and Egyptian LNG.

The project will start production in five years, when the net LNG balance in Asia is expected to tighten as demand starts outpacing supply, which will increase reliance on supplies from other regions, Jeff Moore, Asia LNG manager at Platts Analytics, said. Wood Mackenzie expects Petronas to maintain its long LNG position with 14 million mt/year of uncontracted LNG through to 2030, and LNG Canada contributing 3.25 million mt/year to this uncontracted tranche.

Petronas now needs to divert attention to boosting its upstream profile as global E&P spending gradually limps back to normal. It remains to be seen whether this will extend to the high profile Malaysian deepwater projects that had stalled at low oil.

Barclays said in its global 2018 E&P spending outlook that overall spending from Asia and Australia is expected to increase 6%, led by PetroChina and Petronas.

-- Eric Yep, newsdesk@spglobal.com

-- Edited by Elizabeth Thang, newsdesk@spglobal.com