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Petronas: To float or not to float?

Petronas’s financial success makes it a target for a government desperate for new revenue streams

Despite posting some impressive earnings, Malaysia's state-owned oil company Petronas could be forgiven for taking a few anxious looks over its shoulder. Four months on from the country's shock election result, which turfed out prime minister Najib Razak and returned the veteran former premier Mahathir Mohamad to power, the cash-strapped government needs to secure new revenue streams. Petronas could be primed as a sacrificial lamb, with an initial public offering of 25% of its equity a possibility.

The idea emerged within weeks of the Pakatan Harapan government coming to power on a mandate to root out corruption. Ministers were reported to be mooting a float for Petronas, Malaysia's only Fortune-500 company, with an eye on the sizeable revenue that it would generate.

Local media had claimed that selling off a quarter-stake in Petronas could raise up to RM200bn ($50bn), which would eliminate about 20% of Malaysia's debts and liabilities, which now exceed the RM1-trillion mark and are equivalent to 80.3% of the country's GDP.

Petronas, which announced a 26% increase in post-tax profits the first quarter of 2018, at RM57.9bn, is a compelling proposition for investors. And given that the government has abolished an unpopular 6% goods-and-services tax (GST)-and thereby deprived itself of an income source estimated to have raised some $11bn in 2017-the proceeds of a public sale would plug that gap.

Political opposition

Yet local observers see numerous hurdles thwarting plans for a speedy IPO of the state Malaysian oil company. "It won't be easy as there will be very strong opposition from the political parties," says Azim Faris Rahim, an analyst at BIMB Securities in Kuala Lumpur.

A more likely outcome is for the government to "squeeze" more revenue out of Petronas. Government sources have indicated that the authorities could pocket more by imposing higher taxes and dividends. "They've removed the GST, so they really need additional income, and that would mean higher dividends," says Rahim.

There is precedent for such a move. Petronas raised its dividend pay out to the government last year after its Q2 performance improved on the back of stronger oil prices. Over last year as a whole, it paid RM16bn, an increase on the RM13bn it handed over to the government in 2016. This year, it's suggested, the government could accrue some RM8bn more in revenues from Petronas than in 2017.

Getting more cash out of Petronas would prove an easier political sell than a stock-market flotation, but the latter option still offers substantial benefits for Mahathir's government. For example, an IPO would provide a handy means of settling a sensitive and protracted royalty dispute between the government and the regional states, where the country's hydrocarbons reserves are located.

Possible compromise

An IPO could deliver shares in Petronas to those states, which have been demanding more revenues and autonomy from the centrally-run NOC. It could also stymie the state of Sarawak's ambitions to establish its own version of Petronas.

In the end, a compromise solution may be found. The government had pledged to pay 20% royalty to the regional states. Now it's saying it will be 20% of Petronas's profits, rather than 20% of its revenues. "We will see strong demand from Sarawak for the 20% royalty on revenues, but Petronas can't afford to give this to the states. So the 20% royalty on profits looks the most likely outcome," says Rahim.

Clarity on Sarawak's bid for hydrocarbons autonomy may yet emerge in time. On 4 August, Personas lodged an application before the Federal Court seeking clarity on Sarawak's status. The company says it's committed to participate in the oil and gas industry in the state, for as long as it's within the framework of the current Petroleum Development Act.

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