Fitch affirms Indonesia's PT Pertamina at 'BBB-'/Stable
Friday, June 10 2016 - 07:03 AM WIB
Rating Equalised with Sovereign: Pertamina's ratings are equalised with that of its parent, the Republic of Indonesia (BBB-/Stable), as per Fitch's Parent and Subsidiary Linkage methodology. This reflects the strong operational and strategic linkages between the parent and the company. Pertamina is the sole refiner in Indonesia and the dominant retailer of petroleum products. It remains one of the most important state-owned entities in executing Indonesia's national energy policy. Fitch assesses its standalone credit profile at 'BBB-'.
Public Service Obligations: Pertamina performs a public service obligation (PSO) by selling certain petroleum products below market prices. The government makes up the shortfall via subsidies to ensure Pertamina receives a predetermined margin on the products sold under the PSO. These subsidies are important for Pertamina to operate as a profitable entity, particularly because its downstream operations accounted for about 43% of EBITDA in 2015, up from from just 6% a year earlier. We expect subsidies to comprise over half of Pertamina's EBITDA over the next three years and an absence of the subsidies can make it challenging for Pertamina to continue with its planned investments.
Risk from Subsidy Reforms: Pertamina's subsidy requirement fell during 2015 due to the fuel price reforms undertaken by the Indonesian government, along with the fall in crude oil prices. The company received a subsidy of USD3.3bn in 2015 (2014: USD12.5bn). The state removed subsidies on gasoline in January 2015, and changed the subsidy mechanism for diesel, with the subsidies now being fixed in nature, rather than variable. However, the fixed diesel subsidy formula can increase the risk that Pertamina does not recover its costs, if retail prices of fuels are not revised adequately or at regular intervals.
The government had initially planned to revise fuel prices at least once a month, but has gradually moved to a policy of revising fuel prices every three months. The government also continues to set the prices for gasoline despite the removal of related subsidies, highlighting the sensitive nature of fuel prices in Indonesia, which has a history of social unrest in response to fuel price increases. Fitch will closely monitor developments in the reforms, particularly if fuel will continue to be sold at commercial prices in a high price environment.
Large Capex and Investments: Pertamina expects to spend around USD17bn over the next three years on capex for increasing its oil and gas production and expanding its refining capacity. The high capex is likely to result in a significant increase in Pertamina's debt levels, which along with weaker profitability due to low oil prices, is likely to drive up its leverage. Pertamina externally sources around 40%-50% of its net crude requirement for its refineries and about 45% of its refined products. Increasing Pertamina's upstream production and refinery capacity augmentation and improvement remain important to improving the company's profitability and containing the state's potential subsidy expenses. We expect Pertamina's oil and gas production to continue to rise by over 15% over the next three years supported by these investments (2015:11%).
Weakening Credit Metrics: We expect Pertamina's FFO-adjusted net leverage to increase to around 4x in 2016 (2015: 2.0x) and remain around this level till 2018, driven by weak profitability and high capex. Fitch expects Pertamina's free cash flows (FCF) to turn negative in 2016 (2015: positive USD4bn; 2014: negative USD1.5bn) and continue to remain negative in 2017 and 2018. The fall in Pertamina's working capital requirement due to low oil prices during 2015 supported its positive FCF and lower net debt levels (2015: USD10.5bn; 2014: USD13.9bn).
Strong Liquidity: Pertamina's liquidity remains strong with cash balance of USD3.1bn as of end-2015 (2014: USD3.6bn) and strong access to funding. Fitch believes that Pertamina will continue to have strong access to bank and bond markets given its state linkages and that it will be able to meet its debt obligations in this period and obtain funding for expansion.
Standalone Profile: Pertamina's standalone credit strength reflects its vertically integrated operations, large scale and dominant position in Indonesia's retail fuel market. However, its operating strengths are offset by its short upstream production position, small mid-stream capacity relative to its overall petroleum product sales, and weakening in its credit metrics. Pertamina is one of Indonesia's largest producers of crude oil, accounting for over 20% of the country's crude output. Overall, Fitch considers Pertamina's standalone credit profile to be a weak 'BBB'. (ends)