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

(Fitch Ratings - Singapore/Jakarta - 07 Feb 2023)-- 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 those of its parent, the Indonesian state (BBB/Stable), in line with Fitch's Government-Related Entities Rating Criteria. The equalisation is based on a 'Very Strong' likelihood that Pertamina would receive government support as Indonesia's national oil company (NOC).

We continue to assess Pertamina's Standalone Credit Profile (SCP) at 'bbb-', reflecting its vertically integrated operation, dominant position in Indonesia's energy market and the competitive cost position of its upstream operation. This is offset by regulatory fuel-pricing risk, manifested in delayed compensation payments for unsubsidised fuel, historically. However, the regulatory risk has reduced, as Pertamina received prompt payments for its 2022 compensation, along with clearing of dues from previous years. Indonesia also enacted a law in 2022 stipulating quarterly compensation payments. A consistent record of timely compensation payments, in accordance with the law, through oil price cycles could lead to an upward revision of the SCP, subject to the financial profile remaining adequate.

Key Rating Drivers

'Very Strong' State Linkages: We believe 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.

We assess the support record as 'Very Strong'. The government effectively controls the price of most fuels distributed by Pertamina, some of which are sold below market rates. The state supports Pertamina through various mechanisms, including subsidy reimbursements for fuel sold under the public-service obligation mandate and compensation for cost under-recovery for other fuels. The state has in the past also awarded Pertamina some large oil and gas blocks upon the expiry of production-sharing contracts, helping improve its business and financial profile.

'Very Strong' Incentive For State to Provide Support: We see the socio-political implications of a default by Pertamina as 'Very Strong', as it would damage Indonesia's energy security, including derailing the large investments needed in the oil and gas sector, domestic fuel production and state imports; Indonesia, through Pertamina, imports a large share of its retail 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.

Timely Compensation Payments: The government has cleared Pertamina's historical compensation payments and those accrued till 3Q22. We expect 4Q22 payments to be made in 1Q23. Our rating case conservatively assumes that 70% of the compensation due in the current year will be paid in the year after, given the lack of a record of implementing the new law. Nevertheless, payments are likely to be lower, based on our lower oil-price assumptions and the fuel-price hikes in 2022. We expect Pertamina to receive about USD9 billion as compensation and USD4.5 billion in subsidies in 2023.

Volume Growth Supports EBITDA: We expect the downstream volume recovery in 2022 to strengthen over the next four years, as the economy recovers from the Covid-19 pandemic. EBITDA should also be boosted by strong upstream volume, as production ramps up at the Rokan oil field, offsetting any natural decline form mature oil fields. However, upstream production is likely to decline in the long term, due to Indonesia's ageing oil and gas assets. The cost position of the upstream operation is rising with higher costs at Rokan, but remains robust at USD12-13/barrel of oil equivalent.

Large Capex: We estimate capex of around USD9 billion in 2023 (2022 estimate: around USD9 billion) and thereafter to range between USD10 billion-15 billion; this is below management's medium-term expectations. We expect capex to be equally divided between maintaining production from Pertamina's ageing oil and gas fields and enhancing its refinery capacity and complexity over the next two years. Some large production blocks, including those recently acquired, require heavy investment to sustain production and are the key drivers behind our high upstream capex expectations.

Adequate Financial Profile: We estimate that EBIDTA net leverage will rise in 2023, but remain conservative at 0.6x (2022 estimate: 0.2x), with robust upstream earnings from strong oil prices and more timely compensation payments being offset by rising capex. Thereafter, EBITDA net leverage is likely to reach 1.8x by 2025 based on our oil price assumptions. The company continues to evaluate opportunities to enhance its capabilities across the value chain. We do not factor any potential acquisitions in our rating case, but believe that the SCP has the headroom to support such investments.

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 standalone 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

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 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-/Stable) are also equalised with those of its parent, the Indian sovereign (BBB-/Stable). IOC has 'Very Strong' socio-political and financial implications of default, but 'Strong' status, ownership, and control due to the lower 52% state ownership, against 100% for Pertamina. We assess IOC's support record at 'Strong' against 'Very Strong' for Pertamina, which consistently receives subsidies for selling certain petroleum products below market price. This compares to the more extraordinary support received by IOC.

Key Assumptions

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

- Oil prices based on Fitch's Brent price deck of USD85/barrel (bbl) in 2023, USD65/bbl in 2024 and USD53/bbl thereafter

- Upstream volume to remain flat in 2023 as Pertamina integrates Rokan. Thereafter, production declining by 2% a year

- Petroleum sales volume increasing by 1%-2% a year

- Unchanged retail prices for the majority of retail fuels

- Subsidy reimbursement payments remaining at USD4.4 billion-4.8 billion in 2023-2024, falling to USD3.2 billion thereafter on lower oil prices

- About 70% of compensation payments to be received in the following year. Compensation claims falling to USD9 billion in 2023 on lower oil price assumptions.

- Capex of around USD9.0 billion in 2023, USD10.8 billion in 2024, USD11.8 billion in 2025 and USD12.2 billion in 2026.

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 receiving 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 14 December 2022:

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

- 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.

- 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.

- Public Finances: A material increase in the overall public debt burden closer to the level of 'BBB' category peers, for example, resulting from failure to reduce the fiscal deficit to pre-crisis levels or accumulation of debt by publicly owned entities.

 

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

- 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.

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

- 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's liquidity remains strong, with a cash balance of USD11.7 billion as of June 2022 and strong access to funding. This is against short-term debt repayments of USD7.6 billion, including USD3.7 billion of short-term loans. We believe Pertamina will maintain its strong access to bank and bond markets, taking into account 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.

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 rating is linked to Indonesia's sovereign rating.

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 its SCP and is relevant to the rating in conjunction with other factors.

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)