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

(Fitch Ratings - Jakarta - 31 Jan 2024)-- 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, and the ratings on its 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).

Pertamina's Standalone Credit Profile (SCP) remains at 'bbb-', reflecting its vertically integrated operations, dominant position in Indonesia's energy market, and competitive cost position in the upstream business segment. However, these strengths are partly tempered by risk relating to retail fuel price controls by the government and receipt of timely compensation by Pertamina for under-recoveries on account of fuel price caps.

Fitch believes the introduction of a law in 2022 relating to compensation income and timely compensation receipts by Pertamina during 2022 and 2023 is positive for its credit profile. A sustained record of consistent payments under the new government, after upcoming elections, could lead to an upward revision of the SCP.

Key Rating Drivers

'Very Strong' Sovereign Support Responsibility: We evaluate the sovereign's involvement in Pertamina's decision-making and oversight as 'Very Strong'. As the sole owner of Pertamina, the government appoints its board and senior management, and directs and approves investments. The state also effectively keeps prices for certain fuels sold by Pertamina at below market rates. Pertamina serves as the state's holding company for the oil and gas sector, playing a pivotal role in energy security of the country, including meeting the state's public-service obligations.

We also assess the precedents of support from the sovereign as 'Very Strong' as the government 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' Support Incentive: Fitch views Pertamina's role in preservation of government policy as 'Very Strong' as it plays a key role in the nation's energy security. Its default would derail the substantial investments planned in Indonesia's oil and gas sector and significantly affect fuel availability in the country. We also assess the contagion risk to be 'Very Strong' if Pertamina defaults, as financial consequences for the state and other state-owned enterprises would be material. Pertamina is considered a reference issuer in Indonesia.

Timely Compensation Receipts: The government continues to promptly settle compensation payments to Pertamina. The state has paid all compensation due until the end of 3Q23, with only amounts due in 4Q23 remaining outstanding. This is driven by the implementation of a new law in 2022 facilitating quarterly compensation disbursements by the government. Fitch's conservative rating scenario anticipates that 85% of owed compensation, including 4Q dues from the previous year, will be disbursed within the current year, factoring in some likely delays after elections.

Robust EBITDA: We expect Pertamina's EBITDA to remain strong, propelled by moderate volume growth across both upstream and downstream segments. We foresee a 1%-2% expansion in end-product volume, supported by Indonesia's economic growth over the next four years. In the upstream segment, we expect production growth to slow to 3%-4% in the next three years, in contrast to the 8% annual growth in 2022 and 2023 that was aided by the addition and expansion of the Rokan block. Pertamina's upstream capex should support volume growth, in our view.

Significant Capex Initiatives: Fitch expects Pertamina's capex to continue to increase over the next four years (2023 estimate: USD6.5 billion, 2022: USD4.5 billion) due to ongoing projects in the upstream and downstream segments. We expect annual capex to gradually rise to about USD15 billion by 2027, evenly distributed between sustaining and expanding production from Pertamina's maturing oil and gas fields, as well as enhancing its refinery capacity and complexity over the next four years.

Pertamina's upstream capex will be for increasing output from existing and recently acquired large blocks, like Masela and related projects. The downstream segment aims to increase processing capacity by about one third to 1.4 million barrels per day, boost fuel production capacity by around 70%, and significantly enhance petrochemical capacity over the next four years. This strategic expansion accounts for nearly half of the group's total estimated capex in the next four years. Pertamina plans to allocate about 10% of its total capex to its new energy business, supporting its energy-transition initiatives.

Adequate Financial Profile: Fitch forecasts Pertamina's EBITDA net leverage to gradually rise over the next four years, reaching around 2x by 2026, as we incorporate moderating oil pricing along with rising capex. Despite the increase, we expect the financial profile to remain comfortable for its SCP, leaving sufficient headroom for any inorganic investments. The company remains opportunistic in potential acquisitions, but Fitch does not factor any acquisitions into the rating case and treats any that emerge as an event risk.

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.

We assess the likelihood of support for Pertamina from the Indonesian sovereign as 'Very Strong', based on the key rating factor assessments under Fitch's new Government-Related Entities Rating Criteria. The sovereign's active involvement in investment decisions, budgetary support, appointment of Pertamina's leadership and retail-price controls for certain fuels underpin our 'Very Strong' assessment of its responsibility to support.

Pertamina receives subsidy and compensation reimbursements for meeting the state's public-service obligations, which are approved by the parliament, supporting our 'Very Strong' assessment for the precedent of support subfactor.

Fitch also assesses the impact of Pertamina's default on the preservation of the government's policy role as 'Very Strong', as we believe any default by the company will pose a significant risk to investments critical for Indonesia's oil and gas sector and overall energy security. Fitch scores the contagion risk as 'Very Strong', as we believe Pertamina is viewed as a reference issuer for the Indonesian market, and its default could substantially impact the government's and related entities' access to debt, both domestically and internationally.

Key Assumptions

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

- Oil prices based on Fitch's Brent price deck of USD80/barrel (bbl) in 2024, USD70/bbl in 2025, USD65/bbl in 2026 and USD60/bbl thereafter.

- Upstream volume to increase by about 4% a year in 2024-2027, incorporating the capex spent on development of upstream assets.

- Petroleum sales volume to increase by 1%-2% a year over 2024-2027.

- Unchanged retail prices for the majority of retail fuels.

- Subsidy reimbursement payments remaining at USD6 billion in 2024 and gradually declining to USD5 billion by 2026-2027.

- About 85% of the compensation payable in 4Q of the previous year and 1Q-3Q of the current year to be paid every year. This results in compensation of about USD8 billion in 2024, gradually reducing to close to USD3 billion by 2027.

- Capex of around USD8.5 billion in 2024, USD10 billion in 2025, USD11.7 billion in 2026 and USD14 billion in 2027.

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 1 September 2023

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.

- Public Finances: A material increase in the overall public debt burden closer to the level of 'BBB' category peers; for example, resulting from rising fiscal deficits 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 in structural indicators, such as governance standards, closer to those of 'BBB' category peers.

Liquidity and Debt Structure

Adequate Liquidity: Pertamina's liquidity remains adequate, with a cash balance of USD18.3 billion as of 30 June 2023 and strong access to funding. This is against short-term debt repayments of USD4.8 billion, including USD835 million 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 equalised to Indonesia's sovereign rating. (ends)