Selling Petronas stakes may help raise capital

The potential sale of stakes to the producing states can also be viewed as a double-edged sword, says expert

by SHAZNI ONG/ pic by BLOOMBERG

THE idea of allowing oil and gas (O&G)-producing states to acquire stakes in Petroliam Nasional Bhd (Petronas), as mooted by Prime Minister Tun Dr Mahathir Mohamad, is a good move as it can increase liquidity in the Malaysian market.

Asia School of Business assistant professor of management Dr Renato Lima de Oliveira said the move would also be a cheaper way for Petronas to raise capital without giving away their strategic control.

“The big question is, where will this money go? Which projects? Selected according to which criteria?

“If they have good investment opportunities right now and are selling to raise capital to pay for them, like new projects in Mexico and Brazil, which Petronas has been involved, then the company will benefit from this operation,” he told The Malaysian Reserve (TMR) yesterday.

In a recent interview with Reuters, Dr Mahathir said the government might sell its stakes in Petronas to Sarawak and Sabah, where the company’s O&G reserves are in a bid to raise funds for the debt-ridden government.

He said the government was unable to meet the demand by the states following the increased royalties paid by Petronas of up to 20% of its profit, and allowing the states to own stakes in the company could provide a good solution.

Dr Mahathir added that the government could also reduce its stakes in Petronas’ smaller-listed or unlisted units.

Lima de Oliveira said selling shares in excess of the controlling capital of subsidiaries would not be a problem for companies like Petronas.

However, he said the potential sale of stakes to the producing states can also be viewed as a double-edged sword.

“On the one hand, it could bring the decision-makers of these states to share risks and revenues with Petronas, reducing information asymmetry and building trust and cooperation with them.

“They may see, firsthand, how increasing royalties to 20% — as had been promised — can actually lead to a reduction of the attractiveness of investments in Malaysia’s mature resource basin, which has a comparatively high cost of extraction,” he said.

Lima de Oliveira added that there could also be a clear potential for “conflicts of interest”.

“A state may push for one particular investment which can disproportionately benefit itself, but may not represent the best investment opportunity for Petronas as a whole — and, consequently, Malaysians — when viewed in terms of the global portfolio of potential investments.

“This proposal has to be analysed with careful attention to the effects in terms of corporate governance and not only as a way to raise capital,” he said.

AxiTrader Asia-Pacific market strategist Stephen Innes said based on the cost of downstream development, it makes sense for the government to sell off its stakes in Petronas and welcome new partners to share some of the burden.

“I think this is great for local funds and investors that can get more access and ownership to a great company, the third-largest exporter of liquefied natural gas (LNG) in the world.

“From a fiscal point of view, Malaysia is in a mess. So anything that can be done to reduce the burden of debts will be viewed positively by the market and help inwards bond flows,” Innes said.

He added that politically, it also makes sense to avoid the contentious affair about the long-standing demand to increase royalty for Sarawak and Sabah.

“All in all, I think it is suitable for both parties,” he said in an email reply to TMR.

On Monday, Petronas announced that it had successfully completed block trades of its shares in three of its listed subsidiaries — MISC Bhd, Petronas Dagangan Bhd (PetDag) and Petronas Gas Bhd (PetGas).

PetDag’s share closed yesterday 2.06% or 48 sen higher to RM23.78, valuing the company at RM23.62 billion, while PetGas closed 6.91% or RM1.06 higher to RM16.40, bringing the company a market capitalisation of RM32.45 billion. MISC’s shares closed 1.33% or 11 sen higher to RM8.41, valuing the company at RM37.54 billion.