Fitch Affirms Indonesia's Pertamina at 'BBB'; Outlook Stable

(Fitch Ratings - Singapore - 09 Feb 2022)--Fitch Ratings has affirmed PT Pertamina (Persero)'s Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BBB' with a Stable Outlook. Fitch has also affirmed Pertamina's senior unsecured rating, USD20 billion global medium-term note programme and existing senior unsecured notes at 'BBB'.

Pertamina's ratings are equalised with that of its parent, the Indonesian state (BBB/Stable), in line with Fitch's Government-Related Entities Rating Criteria. This is based on our assessment of very strong linkages between Pertamina and the state as well as the state's incentive to provide support. Fitch continues to assess Pertamina's standalone credit profile at 'bbb-', due to its adequate financial profile, low-cost upstream production, integrated operations and regulatory risks relating to fuel prices.

Fitch expects Pertamina to maintain a financial profile commensurate with its SCP over the next three years. Fitch expects Pertamina's EBITDA to rise to USD9.6 billion in 2022 from USD7 billion in 2020 mainly due to the addition of new upstream assets, improving retail volumes, stable retail prices, and adequate subsidies and compensation income.

Key Rating Drivers

'Very Strong' State Linkages: Fitch believes Pertamina's status, ownership and control by the Indonesian sovereign is 'Very Strong'. The state fully owns Pertamina, appoints its board and senior management, and directs and approves its investments. Pertamina was also appointed as the state's holding company for the oil and gas sector. It functions as an important state vehicle to manage retail fuel prices and, hence, inflationary pressure, as it controls the majority of Indonesia's fuel distribution.

'Very Strong' State Support: The government effectively controls the prices of the majority of fuels distributed by Pertamina, some of which are sold below market rates. The state supports Pertamina through various mechanisms, including subsidy reimbursements for fuels sold under the public-service obligation mandate and compensation for the under-recovery of costs for other fuels. The state has also awarded some of the larger oil and gas blocks upon the expiry of their production-sharing contracts to Pertamina, which supports improvement in the company's business and financial profile.

'Very Strong' Incentive to Support: Fitch sees the socio-political implications of a default by Pertamina as 'Very Strong'. A default would damage Indonesia's energy security, including derailing the sizeable investments needed in the oil and gas sector, domestic fuel production and the state's ability to import crude oil and refined products. Indonesia, through Pertamina, imports a large share of its retailed final petroleum products and externally sources 40%-45% of its crude requirements for refining.

We believe a default would also have 'Very Strong' financial consequences for the state and other state-owned enterprises, as Pertamina is one of Indonesia's key borrowers and an active international and domestic debt issuer.

Upstream to Drive EBITDA Growth: Fitch expects Pertamina's upstream production volume to rise by 11% in 2021 and 5% in 2022 after it took over the Rokan oil field in late 2021. Fitch expects the increased output to boost EBITDA from 2022. Fitch expects a slight fall in Pertamina's upstream production in the long term due to Indonesia's ageing oil and gas (O&G) assets.

Fitch expects most of Pertamina's capex to be for maintaining production from its ageing O&G fields. Pertamina's upstream operations also benefit from its strong cash cost position of below USD10 per barrel of oil equivalent in 2020, although we expect this to increase due to the higher costs at Rokan.

Subsidies and Compensation to Rise: We expect our high crude-oil price assumptions to result in an increase in Pertamina's compensation income and subsidies to USD8.5 billion in 2022, after a rise in 2021 (2020: USD3 billion, 2019: USD6.3 billion). Controls on the prices of most retail fuels in Indonesia result in Pertamina selling fuel below costs. However, the company is reimbursed via subsidies and compensation from the state when its selling prices are materially below market rates.

Moderate Financial Profile: Fitch estimates net leverage (net debt/ EBITDA) rose slightly to 1.2x in 2021 (2020: 1.0x) with strong upstream earnings from higher crude oil prices being offset by rising capex. We estimate net leverage at 1.5x-3.0x until 2024. We expect capex and investment intensity to rise after Pertamina takes over some large production blocks that require heavy investment to maintain production, while continued expansion and upgrades of its refineries will also add to capex. Pertamina also aims to acquire oil and gas assets, which we have not factored in our forecasts.

SCP at 'bbb-': Pertamina's SCP reflects its vertically integrated operations, dominant position in Indonesia's energy market and the competitive cost position of its upstream operations, which are offset by regulatory fuel-pricing risk, lower upstream volume relative to downstream sales, and our expectations of a moderate financial profile. Improvement in the SCP depends on the consistent application of the subsidy mechanism and regulations governing reimbursement for the gap between market and selling prices during periods of high oil prices.

Derivation Summary

Pertamina's ratings are equalised with those of its parent, the Indonesian sovereign. Pertamina is one of the country's largest crude oil producers, accounting for the majority of oil and gas output, and has a near-monopoly in refining and retailing of petroleum products. Our assessment of the likelihood of support for Pertamina under each of the four factors of the Government-Related Entities Rating Criteria is the same as our assessment for PT Perusahaan Listrik Negara (Persero) (PLN, BBB/Stable), whose ratings are also equalised with those of the sovereign. PLN accounts for over 70% of Indonesia's power generation capacity and is a monopoly in the country's electricity transmission and distribution sector.

The ratings of Indian Oil Corporation Ltd (IOC, BBB-/Negative) are also equalised with those of its parent, the Indian sovereign (BBB-/Negative). However, Fitch considers IOC's state linkages to be weaker than those of Pertamina. The socio-political impact of an IOC default is 'Very Strong', as it would significantly affect India's ability to import crude, similar to that of Pertamina. However, Fitch regards its status, ownership and control as 'Strong' versus 'Very Strong' for Pertamina because the state holds a lower 52% stake in IOC. IOC's support record is assessed 'Strong' rather than 'Very Strong' because of the established support mechanisms benefitting Pertamina relative to the extraordinary support received by IOC. IOC's financial implications of a default are also 'Strong' compared with 'Very Strong' for Pertamina due to Pertamina's position as a proxy borrower for the Indonesian government.

Key Assumptions

Fitch's Key Assumptions Within Our Rating Case for the Issuer

- Oil prices based on Fitch's Brent price deck of USD71/barrel (bbl) in 2021, USD70/bbl in 2022, USD60/bbl in 2023 and USD53/bbl thereafter; see Near-Term Oil & Gas Prices Raised, Long-Term Oil Price Unchanged, published 7 December 2021, at https://www.fitchratings.com/site/pr/10187176

- Upstream volume to increase by 11% in 2021 and 5% in 2022 after Pertamina takes over Rokan. Production to marginally decline by 2% yearly after 2022.

- Petroleum sales volume increases by 2% a year from 2022.

- Retail prices for subsidised retail fuels broadly unchanged in rupiah terms. Prices of other main petroleum products, which are unsubsidised, to adjust in line with crude prices.

- Subsidies of around USD5.7 billion in 2022, USD5.4 billion in 2023 and USD5.2 billion in 2024 disbursed by the government on a monthly basis

- Compensation for the sale of certain fuels to reach around USD2.5 billion in 2021 and USD2.9 billion in 2022, and decline as lower long-term oil prices alleviate the need. Compensation to be received over a period of three years.

- Annual capex of USD9 billion from 2022 to 2024 (2021: USD6.7 billion)

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

- Positive rating action on the sovereign, provided there is no significant weakening in Pertamina's likelihood of government support

Factors that could, individually or collectively, lead to negative rating action/downgrade:

- Negative rating action on the sovereign

- Weakening of the likelihood of state support

For the sovereign rating of Indonesia, the following sensitivities were outlined by Fitch in a rating action commentary on 22 November 2021:

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Public Finances: A continued increase in the overall public debt burden over the next few years to levels well beyond our current forecasts, for example, resulting from failure to reduce the fiscal deficit to pre-crisis levels or further accumulation of debt by publicly owned entities.

Macroeconomic: A weakening of the policy framework that could undermine macroeconomic stability, for instance, resulting from continued monetary financing of the deficit in the next few years.

External Finances: A sustained decline in foreign-exchange reserve buffers, resulting, for example, from outflows stemming from a deterioration in investor confidence or large foreign-exchange interventions.

Factors that could, individually or collectively, lead to positive rating action/upgrade are:

- External Finances: A material reduction in external vulnerabilities, for instance, through a sustained increase in foreign-exchange reserves, reduced dependence on portfolio flows or lower exposure to commodity price volatility.

- Public Finances: A marked improvement in the government revenue ratio in the next few years closer to the level of 'BBB' category peers, including from better tax compliance or a broader tax base, which would strengthen public finance flexibility.

- Structural: Significant improvement of structural indicators, such as governance standards, closer to those of 'BBB' category peers.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Strong Liquidity: Pertamina had a cash balance of USD11.3 billion as of June 2021, against USD1 billion in short-term debt maturities. Fitch believes Pertamina will maintain its strong access to banks and the bond market, considering its state linkages, and that it will be able to meet its debt obligations and obtain funding for expansion.

Issuer Profile

Pertamina is an integrated national oil and gas company that wholly owns and operates seven of the nine active oil refineries in Indonesia. The company engages in upstream and downstream oil, gas, geothermal and petrochemical operations. Pertamina is also mandated by the Indonesian government to distribute subsidised fuel.

Sources of Information

The principal sources of information used in the analysis are described in the Applicable Criteria.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

Public Ratings with Credit Linkage to other ratings

Pertamina's ratings are equalised with that of its parent, the Indonesian sovereign.

ESG Considerations

Pertamina has an ESG Relevance Score of '4' for Human Rights, Community Relations, Access & Affordability due to the politically sensitive nature of fuel prices in Indonesia. This has a negative impact on the credit profile, and is relevant to the rating in conjunction with other factors. Fuel price hikes have affected affordability and resulted in social unrest in the past. Pertamina sells refined oil products at government-regulated prices and bears the burden of under-recoveries to maintain the affordability of fuel prices.

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg. (ends)