Malaysia’s Petronas seizes bond opportunity

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State-owned energy firm Petronas has returned to Malaysia’s capital markets for the first time since 2009 with what is expected to be the first of several issues aimed at boosting its fiscal reserves.

Following in the footsteps of other international oil companies, Petronas tapped the debt markets, selling RM18.4bn ($5bn) of dollar-denominated bonds in March, issuing the debt in four parts, including a sukuk tranche. Energy firms are taking advantage of attractive borrowing rates against a backdrop of falling oil prices and declining profits.  

Analysts have suggested that some of the funds could be channelled into downstream projects aimed at strengthening the company’s refining and processing capacity, in addition to expanding existing upstream projects, although a formal announcement from Petronas on its plans has yet to be made.

Building reserves

On March 12, Petronas closed the book on four separate bond offerings. Its issue is divided into a five-year, RM4.6bn ($1.25bn) sukuk, priced at 110 basis points over five-year US Treasuries yielding 2.7%. The company’s 30-year debt was priced at 4.5%, while the seven- and 10-year papers offer investors 3.125% and 3.5%, respectively.

The issue, which is Asia’s largest debt offering to date in 2015, constitutes an initial step in a much bigger programme of capital generation. Petronas conducted an international roadshow ahead of the initial issue in a bid to drum up interest in the bond sales, visiting leading financial centres in Asia, the Gulf, Europe and the US. Officials at Petronas confirmed a Reuters report that that the company met with potential investors in March ahead of a planned $15bn multi-currency conventional bond programme and a one-off dollar-denominated sukuk issuance of $2bn.

Xavier Jean, corporate ratings director with Standard & Poor’s Rating Services, said that the cash-rich firm is in a good position to leverage its strong stand-alone credit rating to get a competitive rate from its debt funding. “This will give the company more financial flexibility and keep the company in a net cash position,” he said, noting that the timing of the programme was good given that the company had not tapped the debt markets in recent years. 

Weaker earnings warning

The move into the market came as Petronas posted a RM7.3bn ($1.97bn) loss in the fourth quarter, down from a RM12.8bn ($3.45bn) profit in the same period a year earlier.

Ratings agency Moody’s said that the company’s earnings prospects would be weaker this year due to the fall in oil prices. An average price per barrel for oil of $55 in 2015 would push down earnings by 30% year-on-year, given the firm’s dependence on upstream operations, including exploration and production of oil, which accounts for almost 80% of its income.

However, the outlook for Petronas next year is brighter, with the company’s earnings expected to improve in line with a forecast rise in oil prices to an average of $65 in 2016. “Petronas’ financial metrics are still stronger due to its higher profitability stemming from a lower cost of production and its conservative financial profile,” said Moody’s.

Vikas Halan, vice-president and senior credit officer at Moody’s, said its rating of the company’s $17bn medium-term note programme was underpinned by the firm’s high degree of operating integration, profitable domestic production sharing contracts, large-scale hydrocarbon reserves and revenue stability from substantial gas reserves.

Halan added, however, that ratings were constrained by the geographical concentration of Malaysia’s oil and gas reserves, the relatively small scale of its downstream operations, and exposure to the cyclical oil and gas industry.

Alongside the bond offerings, Petronas has moved to shore up its finances by curbing spending. In early March, CEO Shamsul Azhar Abbas said the company would reduce capital expenditure by at least 10% this year, possibly increasing to 15% if oil prices slip further. He acknowledged that cuts to capital and operational expenditure, which could reach 30%, risked impacting output, but said production was expected to rebound once the market returned to positive growth.  “The next few years may see some tapering of production due to capex and opex cut, but once we start to recover again, the production will catch up,” he commented. “We are still studying the impact on production.”

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