Petronas’s US$5 billion bond issue raises questions over possible 1MDB bailout

Petronas's last foray into the bond market was 6 years ago, thus raising some suspicion among analysts that the funds raised could be used by the government to help 1MDB. – The Malaysian Insider file pic, April 20, 2015.Petroliam Nasional Bhd’s (Petronas) recent move to raise US$5 billion through debt securities – especially when the government is stepping in to aid the beleaguered 1Malaysia Development Bhd (1MDB) – is being questioned.

“It could be because of 1MDB (that Petronas’s bond issue is in the spotlight) but Petronas is usually transparent and more than happy to answer any questions that surface... it puts any doubts to rest,” says a source from the oil and gas industry.

It is worth noting that Petronas had been away from the bond market for six years. It could not be reached for comment on the matter.

While there is no conclusive evidence, it is feared that Petronas could be used to bail out 1MDB or, more accurately, take over the latter’s power generation arm, Edra Global Energy Bhd.

Edra was headed for a listing valued at RM10 billion, but the exercise could have been scuttled by the difficulty in finding investors.

1MDB has accumulated debts of RM42 billion in just a few years of operation. Edra too is laden with RM15 billion of debt but it has 16 power plants.

Note that Petronas recently made a foray into power generation, building a 1,220mw gas-powered plant in Pengerang, Johor.

It also has another gas-powered plant in Kimanis, Sabah.

But asks a market watcher, “Petronas is in a net cash position... so why borrow?”

The bond issue also comes at a time when Petronas has irked many local oil and gas companies with its plan to cut capital expenditure by as much as 10% and operating expenses by 30% this year.

As at December 31, 2014, Petronas had cash and cash equivalents of RM116.8 billion, long-term debts of RM30 billion and current liabilities of almost RM6.8 billion.

According to reports, it has issued a five-year US$1.25 billion sukuk that is priced 110 basis points above five-year US Treasuries to yield 2.7%, and sold three tranches of conventional debt securities denominated in US dollars with an average yield of 3.8%.

Also, Petronas is the first Asian oil company to tap the debt market since crude oil prices plunged in June last year.

It is common knowledge that the government relies heavily on Petronas for oil and gas revenue but the weak oil prices have hit the national oil company’s bottom line – it posted an after-tax loss of RM7.3 billion on revenue of RM79.4 billion in its fourth financial quarter ended December 31, 2014, its first since it started quarterly reporting five years ago.

The loss was generally due to oil prices crumbling from US$115 per barrel last June to around US$45 in January this year, resulting in impairment of some RM22.6 billion.  

Yet, Petronas will pay RM26 billion in dividends to the government this year from its after-tax profit of RM47.6 billion on revenue of RM329.1 billion in FY2014. 

In defending Petronas’ bond issue, executives familiar with the oil company say its strategy involves raising debt when interest rates are low.

“In 2009, Petronas issued a 10-year debt security with a 5.25% yield... oil prices back then were strong – between US$80 and US$90 a barrel, so the debt security was understandable,” one of the executives says.

She points out that quite a few other oil companies have tapped the bond market for funds. “They can’t all be wrong,” she quips. 

Oil major ExxonMobil, which is based in Irving, Texas, issued US$8 billion worth of bonds earlier this month – the largest bond offering in its history.

The proceeds from the issue are for general purpose funding, including acquisitions, capital expenditure and refinancing, say reports.

In February this year, Chevron, which is based in San Ramon, California, raised US$6 billion in debt securities to refinance short-term borrowings, capitalising on the availability of cheap funds.

While Petronas’ bond issue has its merits, what is also clear is that it is on the lookout for distressed assets.  

With the drastic fall in oil prices over the past months, many oil and gas companies are on the verge of going belly up, which could present Petronas with opportunities to expand.

While not an oil and gas example, China National Chemical Corp is taking over Pirelli – a multinational corporation with a lot of history – in a US$7.7 billion.

So, Petronas could be looking for such acquisitions.

Nevertheless, the fear that the national oil company is involved in a bailout of 1MDB is not unfounded because Petronas has, in the past, rendered assistance to the government for whatever reasons, many of which were never really explained.

For instance, in early 2004, the oil company surfaced as a substantial shareholder with almost 10% equity interest in national utility company Tenaga Nasional Bhd, but ceased to be a substantial shareholder in September 2005. This acquisition never made sense but those in the know say Petronas was assisting the government.

Perhaps, this explains why the market is watching its latest bond issue like a hawk. – The Edge Weekly