Special Report: Working the golden goose

This article first appeared in The Edge Malaysia Weekly, on December 16, 2019 - December 22, 2019.

Mahathir with Wan Zulkiflee. Photo by Sam Fong/The Edge

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Petronas has contributed much to the government’s coffers. Now the shareholder needs more, faster.

 

LAST Monday, Petroliam Nasional Bhd (Petronas) was reported to have raised RM6 billion by selling portions of its shareholdings in Petronas Gas Bhd (PetGas), Petronas Dagangan Bhd (PetDag) and MISC Bhd while retaining a controlling stake as part of its “portfolio management strategy”.

The next day, Prime Minister Tun Dr Mahathir Mohamad said in an interview that the federal government was considering selling stakes in Petronas to oil-producing states Sabah and Sarawak, and trimming its interest in unlisted units to “raise funds for ourselves”.

One name came up: Mahathir told the press in New York just months ago that an initial public offering (IPO) of Petronas’ golden goose, its wholly-owned upstream unit Petronas Carigali Sdn Bhd (PCSB), is on the cards.

Touching on the matter in a recent interview with The Edge, Petronas president and group CEO Tan Sri Wan Zulkiflee Wan Ariffin said a PCSB IPO had been discussed, although only “in concept”.

He underlined several things to consider: the valuation it can attract from the market, how letting go of a stake in PCSB affects the integration within the Petronas group and the impact on Petronas’ long-term capacity to give out dividends.

These are valid considerations. Petronas’ upstream operation is a much bigger component in the wider group relative to its listed units. It certainly can be monetised, but how should it be done?

 

Listing a giant

For simplicity, a PCSB listing here is equated to a listing of Petronas’ upstream assets — although for operations in Myanmar, Egypt and Turkmenistan, subsidiaries bearing the “Carigali” name are placed under Petronas International Corp Ltd.

By implementing the valuation used by the recent listing of oil and gas behemoth Saudi Aramco, Petronas group’s market capitalisation could range from RM689.5 billion to RM980.9 billion, according to news reports.

At a typical price-earnings ratio of 15 times of Petronas’ FY2018 net profit of RM55.31 billion, the group itself would be valued at RM829.65 billion.

This puts PCSB’s valuation — it contributed 75% to the group’s net profit in FY2018 — at around RM622.24 billion. That alone is more than half of the FBM KLCI’s market capitalisation of RM1.01 trillion as at Dec 9.

For Putrajaya, listing 10% of PCSB for RM62.22 billion will be more than enough to remove a thorn in its flesh — addressing the mounting 1Malaysia Development Bhd (1MDB) debt plus interest of RM50.5 billion.

PCSB can even list just 5% for RM31.11 billion (US$7.48 billion) — which, in theory, is a modest amount in the international capital market. But who will be buying?

 

Hints from Saudi Aramco and recent Malaysian IPOs

As Saudi Aramco’s listing has shown, it is not easy for an oil and gas IPO to attract the desired valuation right now.

On its first trading day last week, the “world’s most profitable company” touched its much-desired valuation of US$2 trillion — making it the world’s first, albeit briefly. This is higher than the US$1.7 trillion valuation at its IPO.

It downsized its public spread to 1.5% (to raise around US$25 billion) from 5%, and it was listed locally in Saudi Arabia, reportedly because foreign demand was weaker than expected.

Pundits cited concerns over excessive control by the largest shareholder (the Saudi government), geopolitical risks (as much of its assets are concentrated in Saudi Arabia) and forecasts of weakening global demand for hydrocarbon.

In that sense, Petronas is not much different.

It has always been answerable to the federal government — and there were times when Petronas stretched its balance sheet slightly to support Putrajaya’s initiatives such as the RM30 billion special dividend to help repay federal tax refunds.

At home, Petronas faces a certain geopolitical risk with the issue of oil royalty and control over Malaysia’s hydrocarbon resources at play. This involves nearly half of the group’s revenue of RM251 billion — or RM170.7 billion — last year that came from domestic operations and exports.

Unlike Saudi Aramco, Petronas cannot fall back on the domestic stock market for the sake of obtaining a desired valuation.

If history is any indication, it may be a tall order to list just even 1% of PCSB for the estimated RM6.22 billion on the local bourse. Further, the minimum public shareholding spread on Bursa Malaysia is 25%.

The last big-ticket IPO in Malaysia, the re-listing of Lotte Chemical Titan Bhd (LCT) in 2017, provides an indication of the depth that Bursa has to absorb big-scale IPOs currently.

Initially eyeing RM5.92 billion through an offer of 30% of its enlarged share capital, LCT managed to raise only RM3.54 billion as the IPO size was scaled back by one-fifth, its offer price cut to RM6.50 from RM8 apiece and the retail portion only 62% subscribed — over half of which was then bought back by LCT in the first week of listing.

It appears that many anticipated sizeable IPOs here have faced hiccups too — such as the RM1.5 billion IPO of home improvement retailer Mr DIY, which was delayed to next year, and the US$500 million (RM2.08 billion) fundraising by Malaysia’s largest fast-food chain QSR Brands (M) Holdings Bhd, which has been postponed indefinitely, according to news reports.

 

More shareholders complicate decision-making

As Mahathir pointed out, the other option is to sell stakes in Petronas privately to oil-producing states like Sabah and Sarawak. “Petronas is a very big company. It depends on how much [the states] can pay also,” he was quoted as saying.

Meanwhile, the Terengganu government has voiced its interest in buying a stake in Petronas for “a reasonable amount of equity”.

But having more shareholders could complicate the decision-making process, from dividend payout to operations. A Sarawak minister even came out to say that a stake sale would complicate the ongoing oil royalty dispute.

As it is, Petronas needs to balance its responsibility to i) the federal government, ii) the national oil and gas industry as its custodian, and iii) the group’s own growth for sustainability.

With complete ownership of Petronas — and indirectly PCSB, which is the biggest income contributor in the group — Putrajaya has the discretion to request Petronas to prioritise the country’s needs.

The RM6 billion sale in PetGas, PetDag and MISC last Monday is a clear example. If Putrajaya insisted, it could use the funds for nation-building purposes. Petronas did not respond to questions from The Edge on the utilisation purposes.

 

Other feasible options

Instead of PCSB, Petronas could consider paring down stakes in other downstream units, which have less implication on the larger group. An IPO of its 74%-owned South African fuel retailer, Engen Ltd, may be on the cards, Bloomberg reported in October.

With a net profit of ZAR1.8 billion (RM510 million) in FY2018, Engen could fetch a market capitalisation of up to RM10 billion at the valuation given to its peers.

Another unit is Petronas Lubricants International (PLI). After ramping up production capacity in recent years, PLI is well-equipped to capture markets like India and China — and is focusing on higher-margin synthetic products while actively exploring the speciality chemicals and electric vehicle fluid to future-proof the business. It is currently the ninth largest lubricants group in the world by volume, with sales of 1.2 billion litres annually.

Going back to Petronas’ dividend to the government, totalling RM252 billion from 2011 to 2019, this represents a decent payout ratio of 58% during the period, or an annual average of RM28 billion.

Selling 5% in PCSB for RM31.11 billion would affect the annual dividend contribution to Putrajaya by around RM1 billion.

Compare this with Putrajaya’s debt obligations, such as the RM13.9 billion in relation to 1MDB debt from 2017 to 2020 (or RM3.475 billion each year), or its debt service charges, which is expected to grow at a slower pace to RM34.95 billion under Budget 2020.

Perhaps Malaysia’s effort to trim its debt level leaves it little room to wait for the goose to lay its golden eggs.

 

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