Fitch Affirms Indonesia's PT Pertamina at 'BBB-'/Stable
Monday, June 16 2014 - 06:20 AM WIB
Pertamina's ratings are equalised with those of its parent, the Republic of Indonesia (BBB-/Stable), reflecting strong operating and strategic linkages, in accordance with Fitch's parent and subsidiary linkage methodology. The affirmation reflects Fitch's view that strong state support will continue in the foreseeable future due to Pertamina's position as one of the most important Indonesian state-owned entities in executing Indonesia's national energy policy. Pertamina is the country's sole refiner and the dominant retailer of petroleum products. Its stand-alone credit profile is currently at the same level as its state-equated BBB- rating.
Public Service Obligation: Pertamina performs a public service obligation (PSO) by selling certain refined products at prices set by the state which are below market prices. Pertamina in turn is compensated through a government subsidy, which ensures it receives a predetermined margin on the products sold under the PSO. Over 50% of Pertamina's sales volumes comprise of these subsidised products, and its EBITDA would be negative if not for this subsidy. The amount of the subsidy was around USD20bn in 2013 compared with EBITDA (including the PSO margin) of USD6.1bn.
Indonesia has, however, demonstrated a willingness to reduce the burden on state finances from energy subsidies. The retail prices of certain subsidised petroleum products were increased in June 2013 in an attempt to contain the subsidy expense. That said, the fuel subsidies did not meaningfully decrease in 2013, and Fitch does not expect a material reduction in 2014, owing to a weaker Rupiah in relation to the USD. Fitch expects Pertamina's role of retailing petroleum products below market prices to continue. This is due to the substantial increases in retail prices which are required to align them with market prices, a politically challenging task in a short-period of time.
Deteriorating Credit Metrics: Fitch expects Pertamina's credit metrics to continue to weaken as the company intends to materially increase its capex and investments in the medium term, which would lead to sustained negative cash flow post investment. Pertamina's funds from operations (FFO)-adjusted net leverage increased to 3.1x in FY13 (1.2x in FY12) and funds from operations (FFO) interest coverage fell to 7x (14x in 2012). We expect the company's financial leverage to deteriorate to around 3.5x to 4x in the medium-term.
Nevertheless, Fitch expects Pertamina's strong state linkages to help it maintain adequate liquidity via good access to bank financing and debt markets.
Increasing Capex and Investments: Pertamina's capex and investment budget in FY14 to FY16 is over USD25bn, including an allocation of USD11bn for acquisition of upstream assets. Fitch estimates that Pertamina externally sources over 75% of its refinery crude requirement and about 50% of refined products sold. Increasing Pertamina's upstream production and refinery capacity remains important to improving the company's profitability and as a result, in containing the state's subsidy expenses. In FY13, Pertamina incurred USD 4.7bn of capex and spent USD2.1bn on upstream acquisitions. Pertamina's upstream oil production increased to about 250 thousand barrels of oil per day(mbopd) in April 2014 compared to about 202mbopd in 2013, owing to its upstream capex and acquisition of O&G assets.
Standalone: Pertamina's standalone credit strength reflects its vertically integrated operations, scale and dominant position in Indonesia's retail fuel market. However, its operating strengths are moderated by its short upstream production position and mid-stream capacity relative to its overall petroleum product sales. Fitch estimates that upstream oil production accounts for about 25% of Pertamina's refinery crude intake, and its refinery output account for about half of its total sales volumes. Pertamina is also one of Indonesia's largest producers of crude oil, accounting for about 24% of the country's crude output. Its financial metrics have been under some pressure owing to large investment requirements. Overall, Fitch considers Pertamina's stand-alone credit profile to be a weak BBB. (ends)