Petronas in leadership transition as oil plunge hammers Malaysia

[KUALA LUMPUR] Malaysia named Wan Zulkiflee Wan Ariffin, a long-time company veteran, to lead its state oil producer, handing him the job of dealing with the slump in crude prices that's eating into revenue the government needs to narrow its budget deficit.

The plunge in the price of crude since June has left Malaysia exposed as oil and natural gas products make up about 22 per cent of exports. That means belt-tightening at the company, known as Petronas, and by extension, the government.

About 30 per cent of the government's RM 225 billion (S$85.6 billion) revenue in 2014 was oil related, including a RM29 billion dividend from Petronas, according to the finance ministry.

"It's fair the government gets a dividend to spend, to patch its budget," said James Lau, who helps oversee US$300 million as an investment director at Pheim Asset Management Asia Sdn. in Kuala Lumpur. "It's equally important that Petronas keeps some reserves to fund the country's need when our resources run out."

Petronas won't generate enough cash from operations this year to cover capital spending and dividend commitments, said Vikas Halan, a Singapore-based vice-president at Moody's Investors Service Inc., estimating the shortfall to be at least RM10 billion.

NEW MAN

Finding the balance now falls to Wan Zulkiflee, 54. He'll succeed Shamsul Azhar Abbas as president and chief executive officer of Petroliam Nasional Bhd. in April, Prime Minister Najib Razak said in a statement via state news service Bernama on Monday.

Wan Zulkiflee is currently chief operating officer and head of Petronas' downstream business. He oversees the company's US$27 billion spending plan in a refining and petrochemicals project in the southern Johor state bordering Singapore.

That's one of two major investments Petronas is working on, the other is a C$36 billion liquefied natural gas project in Canada's British Columbia.

Malaysia could have done a better job of using revenue from when crude prices were high to narrow the fiscal deficit and save more in a dedicated trust, said Lau at Pheim Asset Management.

Norway is an example of managing oil wealth to protect future generations and invest the money generated in education and other areas, said opposition lawmaker Nurul Izzah Anwar.

"Petronas currently is under direct purview of the prime minister," Nurul Izzah said. "I had also moved a bill to amend the Petroleum Development Act 1974 to ensure Petronas is accountable to Parliament rather than the prime minister alone," she said.

FAIR DIVIDEND

Petronas paid an annual dividend of RM27 billion to RM30 billion in the four years through 2013, with little correlation to profit, its annual report shows.

It aimed to gradually reduce the dividend before switching to a payout ratio of 30 per cent of profit to reflect broader oil industry practices, Mr Shamsul said in March 2012.

Oil's collapse has since derailed Prime Minister Najib Razak's efforts to reduce the deficit and sent the ringgit to a six-year low. He trimmed the country's full-year growth forecast last month.

Mr Shamsul, 62, who took over on Feb 10, 2010, argued for Petronas retaining a bigger share of its earnings for exploration and to extend the lifespan of Malayisa's oil and gas fields. The company increased capital expenditure to a record 300 billion ringgit in the five years starting 2012.

BIGGER CHALLENGE

Petronas has a bigger challenge than other state oil firms in Southeast Asia because of its larger contribution to government coffers, said Xavier Jean, a director of corporate ratings at Standard & Poor's in Singapore.

Thailand's PTT Exploration & Production Pcl and Indonesia's PT Pertamina are less accountable to their governments for dividends, he said.

"Petronas in terms of monetary contribution is much more important to Malaysia," said Jean. "The government is obviously very keen to maintain high dividend payouts."

The company generated about RM91 of cash from operations in 2013, sufficient to finance its spending and dividend payment, according to its annual report. It had RM141 billion of cash in 2013.

"It's been historically a very conservative company, financially speaking - from maintaining large cash, being prudent in terms of what it spends, where it spends it, running pretty tight operations," S&P's Mr Jean said. "It would be surprising to see a complete shift of financial policies towards a very aggressive growth or very high level of spending in spite of weaker prices."

STRATEGY RETHINK

The low oil price environment may offer Malaysia a chance to re-think its resources preservation strategy.

Malaysia created the National Trust Fund in 1988 to ensure revenue from natural resources, including oil and gas, continues to generate wealth for future generations. As of 2013, Petronas was the sole contributor to the fund with cumulative contributions of RM8 billion.

"If Petronas is forced to pay more dividend, there will be less to go into that fund for your children and your grandchildren," Mr Lau said. "But the pressing need, the immediate pressing need unfortunately is the budget deficit. I guess we are now paying the price for what we didn't do before."

BLOOMBERG