Tuesday, July 06, 2010

Petronas: The Government's Piggy Bank

The Government must stop treating Petronas as its own piggy bank to break according to its whims and fancies and jeopardising the company's future productivity and profitability

Headlines of major newspapers had on last Friday, 2nd July announced that the profits of Petronas Malaysia dropped 24.5% to RM67.3 billion in its financial year 2010, and its financial contibutions to the Government had declined RM16.4 billion to RM57.6 billion. It was also announced that Petronas had maintained a dividend of RM30 billion to the Government, the same amount as in 2009, despite the sharp decline in profits.

The new Petronas CEO Shamsul Azhar Abbas pointed out that profit after distribution of dividends amounted to RM10.3 billion, a drop of 52.2 per cent from the previous year, and warning that “the dividend payouts could constrain the group’s growth plans as significant re-investment is necessary to generate future revenues.”

This theme was repeated in the Petronas media release on its full year results for 2010 where it stated that “going forward, the Group faces significant and growing challenges in an increasingly difficult industry environment. Existing domestic acreages are maturing, with both reserves and production set to decline unless more investments are ploughed into increasing recoverability from existing oil and gas fields...”

The situation is even more dire when we review the data of how much money the government has been milking from Petronas and the resulting impact on the Group over the past 6 years as shown in Table 1 and Chart 1 below:


Table 1: Utilisation of Petronas Profits 2005-2010



Source: Petronas

The figures clearly demonstrates that the amount of profits left for Petronas re-investment has dropped from a high of 42.5% in 2005 to a record low of 13.5% in 2010.

Similarly the dividend payout ratio has reached 74% in 2010 compared to 57% in 2009 and “is substantially higher than was typically the case in previous years” as disclosed by Petronas. In 2005, the dividends to the government was only RM9.1 billion, before it was increased to RM13 billion (2006), RM20 billion (2007), RM24 billion (2008) and RM30 billion (2009). The company clearly cannot afford to maintain sky-high dividends for the Government despite the sharp drop in profits.

The dividend payable by Petronas, as per any other company must be dictated by the needs of the company and not by the wants of the shareholders, in this case the Malaysian government. Given that Petronas is in need of substantial investment in capital expenditure to “increasing recoverability from existing oil & gas fields”, a greater proportion of profits should be retained by the company to invest and ensure higher profits in the future. A company should only have a high dividend payout ratio when it no longer has utilisation of the profits to generate additional future profits, which is clearly not the case for the capital intensive oil & gas industry.

Chart 1: Decline of Petronas Profits Retained for Reinvestment

The Malaysian government should not use Petronas like a piggy bank which can be broken at any point in time to top up the coffers of the federal treasury according to its whims and fancies. The lack of funds for reinvestment will only in turn severely impede Petronas' ability to secure future revenue, reducing its long-term productivity, profitability as well as efficiency.

Instead, we call upon the Prime Minister to protect Petronas like a golden goose to ensure that it will continue to be able to provide increasing and sustainable revenues to Malaysians over the medium to long term by:

legislating that Petronas retain at least 50% of its profits for future reinvestments.

ensuring that the windfall revenue are only invested in economically productive and necessary sectors such as human capital, renewable energy and green technology.

legislating that at least 20% of these contributions should be “saved” in a National Stimulus Fund for use during economically challenging times if economic growth exceeds 3% per annum.
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