Update Petronas plans cuts and review to counter oil price slump

by **Cals** Wed 20 Jan 2016, 09:00

Update

[size=28]Petronas plans cuts and review to counter oil price slump

By Reuters / Reuters | January 19, 2016 : 11:51 PM MYT

KUALA LUMPUR (Jan 19): Petroliam Nasional Bhd (Petronas) plans to cut spending by up to RM50 billion (US$11.4 billion) over the next four years and review its business structure in response to the profit-sapping slump in oil prices.

The state-owned Malaysian company brings in nearly half of the Southeast Asian country's oil revenue and its woes are bound to add pressure to an economy already reeling from a slide in the ringgit and political uncertainty after a scandal surrounding state investor 1Malaysia Development Bhd (1MDB).

Petronas said in November that it would cut its 2016 dividend to the government by nearly 40% after a 91% drop in profit, with analysts suggesting the payout could be trimmed back again in future.

Petronas made its announcement on spending cuts in an internal memo, a copy of which was seen by Reuters.

"We will go through another round of CAPEX (capital expenditure) and OPEX (operating expenditure) review to target cuts up to RM50 billion over the next four years. This means that we are going to have to defer some of our projects," CEO Wan Zulkiflee Wan Ariffin said in the memo dated Monday.

In February last year Petronas said it planned to cut capital spending by 10% and operating expenses by up to 30% in 2015. It also said at the time that it would cut 2016 capital spending by 15%. Its 2014 capital expenditure was about RM65 billion.

"We have also made a strategic decision to begin a review of Petronas' business operating model for better efficiency in response to the external environment," Wan Zulkiflee said in the memo. The review will result in a change to the organisation's structure, details of which will be disclosed in March.

Contract jobs in the company's non-core businesses will be affected, he said.

In an emailed statement late on Tuesday, Petronas said it has circulated an internal communication on its efforts to cut costs to address the impact of the continuous fall in crude oil prices, but it did not provide details.

MORE DIVIDEND CUTS

Oil prices have dropped by more than 70% in the past 18 months as the world's crude producers have exceeded demand by more than a million barrels a day.

Oil and gas projects worth US$380 billion have been postponed or cancelled since 2014 as companies make drastic cost cuts to survive the oil downturn. The retreat has included the axeing of US$170 billion of projects planned for 2016 to 2020, energy consultancy Wood Mackenzie said last week.

Malaysian Prime Minister Najib Razak, facing lower revenue from the energy sector, is expected to make changes to the 2016 budget this month to adjust for falling oil prices.

The budget assumed oil at US$48 a barrel. Global oil benchmark Brent crude is now trading near US$29.

Moody's analyst Vikas Halan said that Petronas could be forced to reduce dividends further if it reported a loss or forecast more constraints on its cashflow.

"Given their track record on reducing their dividend substantially, we can assume some further reduction, given the extent of decline in oil prices," said Halan.

Petronas might not exit businesses after the review but it could lower investments in some operations, Halan added.

(US$1 = RM4.3830)
[/size]