KUALA LUMPUR: Shell Overseas Holdings Ltd — a wholly-owned unit of Royal Dutch Shell plc — is mulling the sale of its 51% stake in the loss-making Shell Refining Co (Federation of Malaya) Bhd, as it weighs option to exit the downstream business in the country.
However, the new shareholder to take over needs to have a strong financial muscle, considering the whopping RM1.75 billion debt that the refinery needs to service in the next 18 months, besides launching a mandatory general offer.
“On Jan 29 this year, Royal Dutch Shell said in its quarterly results that the Malaysian refinery remains challenging and that it is an asset that needs to be fixed.
“Subsequently, the major shareholder informed the Shell Refining board that it is considering options that include a potential sale of its shares or converting the refinery in Port Dickson into an export-import storage terminal,” Shell Refining chairman Iain John Lo told reporters after the company’s annual general meeting yesterday.
Based on yesterday’s closing price of RM4.84, Royal Dutch Shell’s stake in Shell Refining is worth RM740.52 million.
“In this case, if Royal Dutch Shell sells its entire stake, it will trigger a mandatory general offer to all the other shareholders, which will result in the entry of a new major shareholder. But I want to make this clear that it has not made any decision as it is weighing several options,” he said.
According to Lo, the move to sell the Port Dickson plant has also received blessings from the state’s royal family.
“I think they understand that the refinery operates in a global environment, where prices are set globally. They also understand that it is the right of the business to decide how to operate. Yes, they showed interest and they are keen to know the decision that will be made,” Lo added.
The Employees Provident Fund is the second-largest shareholder of Shell Refining with a 15.93% stake, followed by Permodalan Nasional Bhd, 12.63%, and Kumpulan Wang Persaraan, 2.38%.
Currently, Shell Refining’s refinery plant in Port Dickson, Negeri Sembilan, has a capacity to process 156,000 barrels of crude oil per day.
The Port Dickson plant has been bleeding financially for the last four years since the financial year ended Dec 31, 2011 (FY11), as it grappled with poor refining margins.
Shell Refining’s cumulative losses ballooned to RM1.566 billion in FY14, plagued by an impairment loss of RM461 million, a stockholding loss of RM625.1 million and an operating loss of RM102.6 million. The refinery has not been paying dividends since 2013, due to dismal earnings, despite marginal growth in revenue and sales volume.
Adding to its financial woes, the group has RM450 million in debt due for repayment by year-end. According to Lo, after intense negotiations, creditors have agreed to extend the due date to Dec 31 from June 15.
“We told shareholders that the decision on the future of Shell Refining is quite time-critical because we have a RM450 million loan to be serviced by the end of this year. Any decision on the future of the refinery must come with a financing package because we are highly geared and financing forms the big part of running the plant,” he added.
The group also has an outstanding US$240 million (RM907.2 million) loan, which will be due in September 2016.
The stock fell 23.8% from RM6.05 on Aug 29 to RM4.61 on Dec 30, 2014, in line with the plunging crude oil price. However, it has since rebounded to close at RM4.84 yesterday, giving it a market capitalisation of RM1.452 billion.
This article first appeared in The Edge Financial Daily, on July 1, 2015.