January 18, 2016
The plan by Malaysia’s state-oil company comes as oil prices slide below $30 a barrel
KUALA LUMPUR, Malaysia—Malaysia’s state oil firm, Petroliam Nasional Bhd., or Petronas, is planning to slash as much as 50 billion ringgit ($11.4 billion) in capital and operating expenditure over the next four years, according to an internal memo sent to staff by its chief executive officer.
The plan comes as the continuing rout in oil prices has hurt major oil companies world-wide, with the price of Brent crude tumbling to $28 a barrel on Friday. The slide could spell a further drop in Petronas’s revenue and earnings, as some domestic and international projects may become unprofitable.
Petronas is the Malaysian government’s biggest source of revenue, covering as much as one third of the annual budget—even after cuts in subsidies and the introduction of new taxes to diversify sources of income. Malaysian Prime Minister Najib Razak, whose current budget was based on a $48 price for Brent crude, will table amendments next week to the government’s spending plans.
Malaysia is Southeast Asia’s second-biggest oil and natural-gas producer and the world’s second-largest liquefied natural gas exporter. The country already is struggling amid a depreciating currency and political uncertainty arising from troubles at state-investment fund 1Malaysia Development Bhd., or 1MDB, that has rocked Mr. Najib’s government.
Southeast Asian state-oil firms have been adjusting their businesses to adapt to the lower oil prices since last year. Thailand’s PTT Exploration and Production PCL and Indonesia’s PT Pertamina EP have been trimming capital spending, while Vietnam Oil and Gas Group recently shut down a field as productions costs exceeded international oil prices.
“Moving ahead, we will go through another round of capex (capital expenditure) and opex (operating expenditure) to target cuts up to 50 billion ringgit over the next four years,” Petronas Chief Executive Wan Zulkiflee Wan Ariffin said in an internal memo Monday to staff. “This means that we are going to have to defer some of our projects.”
Petronas confirmed that it had circulated the memo as part of “ongoing efforts to optimize costs to address the impact of the continuous fall in crude oil prices.”
Petronas, Malaysia’s only Fortune 500 company, didn’t specify in the memo which projects would be affected. Some major projects include the $16 billion refining and petrochemical complex in the southern Johor state, a $28 billion Canada natural-gas export project and the construction of two floating LNG projects in South Korea.
Petronas has reacted quickly on the first sign of sliding crude-oil prices by expediting cash generation and cost-efficiency initiatives. In 2015, the company began to review and rebid some of its engineering, procurement and construction contracts, as well as rephase some of its petrochemical projects.
“But we have come to the point where these actions are not enough to counter the impact brought on by rapidly declining oil prices,” Mr. Wan Zulkiflee said in the memo, adding that the company still sees no sign of recovery in crude-oil prices.
The unlisted company has reported falling net profit in four of the past five quarters and a loss in the remaining period. In November, Petronas announced a 91% plunge in net profit for the three months ended September to 1.4 billion ringgit from 15.1 billion ringgit a year ago.
Petronas previously said its operational cash flow wasn’t enough to meet its capital spending and committed dividends for 2015, forcing it to draw on reserves and expedite cost savings. The 2016 dividend to the government will be slashed almost 40% this year, the company said in November.
On top of spending cuts, Petronas has also made a strategic decision to begin a review of its business operating model for better efficiency in response to the external environment, according to the memo.
“This review will result in a change to our existing organization structure, the details of which I hope to be able to share with you in March,” Mr. Wan Zulkiflee said in the memo.
The company has started a review of contract positions not currently critical to core business activities, the memo said.
Moody’s Investors Service cut its credit-rating outlook for Malaysia to stable from positive earlier last week, saying the revision reflects deterioration in the country’s growth and external-credit metrics due to external pressures over the past year.
“It has been a crude awakening for Malaysia,” said Ng Weiwen, a Singapore-based economist with ANZ. “The continued fall in oil prices will weigh on Malaysia’s fiscal balance and ringgit, even as the 1MDB issues subside.”
Write to Yantoultra Ngui at firstname.lastname@example.org
Corrections & Amplifications:
Malaysia’s state oil firm, Petroliam Nasional Bhd., or Petronas, is planning to slash as much as 50 billion ringgit ($11.4 billion) in capital and operating expenditure over the next four years, according to an internal memo sent to staff by its chief executive. An earlier version of this article incorrectly stated the memo was from the chief financial officer. (Jan. 19, 2016)