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A royal cut

12 November 2015 By Una Galani

Austerity measures at Malaysia’s oil giant will need to go further. Low oil prices have forced Petronas to cut the dividend it will pay next year to the government by almost 40 percent. That’s painful for a country that depends on the state-owned group for around one third of federal revenue. But unless it takes wider action, Petronas will still need to dip into its cash reserves to fund the commitment.

Petronas has decided to lower its payout to 16 billion ringgit ($3.7 billion) in 2016 after Brent crude averaged just $50 per barrel during the quarter that ended in September. To put that in perspective, the group’s total contribution to state coffers -including corporate taxes and other royalties – added up to around 68 billion ringgit in 2014.

The worry is that Petronas is still being too generous. Cash flow from its operations amounted to just 17 billion ringgit during the quarter. That would total 68 billion ringgit for the full year if it was maintained at the same pace. Yet capital expenditure alone this year may be as much as 67 billion ringgit. 

That means almost the entire dividend for this year will come out of Petronas’ net cash reserves which currently stand at around 62.3 billion ringgit. Unless the oil price recovers or Petronas cuts costs – which it warns it may have to do – it will have to dip into that pot again in 2016.

Such austerity is inconvenient for embattled Prime Minister Najib Razak who is already fighting for political survival amid allegations of graft. Job cuts by a large state-owned firm will be politically unpopular and trimming spending on new projects will only make Petronas a less reliable fiscal crutch in the future. But if oil prices stay low, Petronas’ dividend cut could be just the beginning.  

This view has been corrected to amend the net cash reserves figure in paragraph four.



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