Fitch Assigns PT Kilang Pertamina Internasional First-Time IDR of 'BBB'; Outlook Stable

(Fitch Ratings - Singapore - 25 Mar 2024)--Fitch Ratings has assigned PT Kilang Pertamina Internasional (KPI) a Long-Term Foreign-Currency Issuer Default Rating (IDR) of 'BBB' with a Stable Outlook.

Fitch equalises KPI's IDR and the Outlook to the parent, PT Pertamina (Persero) (BBB/Stable), based on the agency's Parent and Subsidiary Linkage (PSL) Rating Criteria. Pertamina has high strategic, operational and legal incentives to support KPI, in Fitch's view.

KPI's Standalone Credit Profile (SCP) of 'bb-' reflects a sound business profile stemming from a strong market position and much larger scale of operations than most 'bb' rated peers. KPI's investment plan, however, will keep leverage high over the next four to five years, albeit mitigated by strong funding access. Pertamina's IDR is equalised to its parent, the Indonesian sovereign (BBB/Stable), under Fitch's Government-Related Entities Rating Criteria.

Key Rating Drivers

'High' Strategic Incentive: KPI plays a critical role for Pertamina in maintaining Indonesia's energy security. KPI owns almost all local refineries, supplying almost half of country's transportation fuel needs. KPI's strategic importance is also reflected in Pertamina's extraordinary support that has been extended to KPI via equity support for key projects and shareholder loans. Fitch expects no material change in KPI's financial contribution to Pertamina. KPI contributes about 20% of Pertamina's total assets. The EBITDA contribution remains volatile from its cyclical business.

'High' Operational and Legal Incentives: KPI owns all refineries within Pertamina, providing downstream integration. KPI offtakes Pertamina's entire local crude production and supplies almost the entire output to Pertamina's fuel marketing company, helping maintain a retail monopoly. Pertamina, with a 99.99% direct stake, exerts high control over KPI, approves annual budgets and board and key executive appointments. KPI is a material subsidiary under the cross-default provision of Pertamina's senior unsecured notes, resulting in 'High' legal incentives for Pertamina to support KPI.

Local Refining Monopoly: We believe KPI faces low demand risk as it owns almost the entire local refining capacity in an energy-deficit market. The utilisation rate however has been around 85% as KPI's mostly ageing refineries limit the types of crude they can process, although refinery availability has been above 90%. KPI has multiple suppliers, and sources 60% of feedstock locally, including 35% from Pertamina's upstream entity. KPI's entire volume is sold under long-term contracts at market-linked prices. KPI's profile benefits from multiple modest-sized refineries across Indonesia.

Expansion to Keep Leverage High: KPI plans over USD24 billion of capex in 2024-2030 to boost refining capacity to 1.4 million barrels of oil equivalent per day (mmboed) (2023: 1.05 mmboed) and petrochemical capacity by 4.5x to 7.5 million tonnes per annum (mtpa). Fitch's rating case bakes capex of over USD12 billion, and excludes Grassroot Tuban (GRR Tuban; USD25 billion project) given project uncertainties. Fitch expects KPI's average EBITDA net leverage to stay above 4.5x (2023: 5.4x) and peak above 6.0x over the medium term, with the onset of Olefin TPPI project capex in 2026.

Greenfield Project an Event Risk: Around 50% of KPI's capex is budgeted for GRR Tuban, which plans to produce 216,000boed of fuel products and 4mtpa of petrochemical products. KPI holds a 55% stake in GRR Tuban with the remainder held by Rosneft Oil Company's Singapore subsidiary. KPI targets a final investment decision (FID) for the project in 2024 and construction completed by 2028. In Fitch's view, uncertainties relating to shareholders' capital contribution and the project's configuration on account of accelerating energy transition plans could potentially result in significant delays to the plans.

Multiple Brownfield Projects Manageable: Fitch believes that KPI's expansion plan for multiple brownfield projects carries manageable execution risks and that KPI has extensive experience in the refining industry. The refinery development master plan (RDMP) Balikpapan is one of the key projects and has achieved around 85% completion. KPI expects partial commissioning of 100,000boed additional capacity with an improved Nelson Complexity Index (NCI) by end-2024 and full commissioning by September 2025.

Olefin TPPI, a 1mtpa naphtha cracker plant, is another major project, with planned FID in 2024 and completion in 2028. KPI plans to hold a 51% stake in Olefin TPPI project and has yet to finalise strategic partners for the remaining stake.

NCI to Improve: KPI expects its weighted-average NCI to improve to slightly over 8 after the completion of RDMP Balikpapan, driven by greater flexibility in the crude mix and product slate optimisation. KPI currently has below-average complexity, with a weighted-average NCI of 6.5. This results in a lower gross refining margin (GRM) than similarly rated regional peers.

We expect KPI's GRM to narrow to over USD4.5 a barrel of oil (bbl) in 2024 as industry conditions ease and global economic growth slows, although this is still stronger than mid-cycle levels due to strong product spreads. We expect KPI's GRM to drop to mid-cycle levels from 2025 with the gradual normalisation of industry conditions, before increasing slightly from 2026 with improvement in Balikpapan refinery's NCI to 8 from 3.4 currently.

Derivation Summary

Our approach of equalising KPI's rating to parent Pertamina's is similar to that for Binh Son Refining and Petrochemical Joint Stock Company (BSR; BB+/Stable) and Hindustan Petroleum Corporation Limited (HPCL; BBB-/Stable). BSR's rating is also equalised to that of its parent, Vietnam Oil and Gas Group (PVN; BB+/Stable) and HPCL's rating is equalised to that of its largest shareholder, Oil and Natural Gas Corporation Limited (ONGC; BBB-/Stable), under our PSL rating criteria.

BSR is the only Vietnamese refinery that is majority state-owned, although indirectly through PVN, supplying 35% of the country's transportation fuel needs. Fitch believes that BSR has very high strategic importance to the parent, as BSR is critical in assisting PVN in maintaining Vietnam's energy security. BSR is the group's only refinery, providing downstream integration. BSR off-takes around 45% of PVN's crude production and is a key supplier to PVN's fuel marketing company, PetroVietnam Oil (PVOIL).

The inclusion of HPCL, which is 55%-owned by ONGC, makes ONGC India's third-largest refining and fuel marketing company. HPCL enhances ONGC's downstream integration, reducing cash flow volatility against pure upstream peers. Fitch believes there is a high likelihood of exceptional support from ONGC to HPCL should the subsidiary face financial difficulties, given the high strategic importance that arises from its role in importing crude oil to meet India's energy needs.

Key Assumptions

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

- Brent crude oil prices of USD80/bbl in 2024, USD70/bbl in 2025 and USD65/bbl in 2026;

- GRM of above USD4.5/bbl in 2024, before falling to USD3.5/bbl in 2025 and then improving slightly to above USD4/bbl with completion of RDMP Balikpapan in 2026;

- Refinery utilisation rate of above 85% from 2025;

- Annual capex (excluding GRR Tuban) of around USD1.5 billion in 2024-25 and above USD2.5 billion from 2026;

- No equity infusion by Pertamina or dividend payment by KPI in next three to four years.

RATING SENSITIVITIES

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

- Any upgrade in the Pertamina's IDR, provided the parent's incentives to support KPI remain intact.

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

- A downgrade in Pertamina's IDR;

- Any weakening of Pertamina's incentives to support KPI.

For Pertamina's rating, the following sensitivities were outlined by Fitch in a rating action commentary on 31 January 2024

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.

Liquidity and Debt Structure

Comfortable Liquidity: KPI's cash balance stood at USD1.8 billion at end-2023 with no external debt maturity within a year. A USD3.6 billion outstanding shareholder loan has an automatic annual renewal in place. KPI's liquidity benefits from low external debt maturities during its high capex period of below or around USD200 million until 2028. KPI raised its first external debt of USD3.1 billion in a project finance loan in 2023, with 14 years maturity and amortisation starting mid-2025, for Balikpapan RDMP.

KPI's cash flow from operations will not be sufficient to cover its huge capex plan, and it will have to rely on new borrowings. KPI's liquidity is supported by committed, undrawn bank facilities of over USD1 billion maturing beyond one year and USD2.3 billion in an unused amount under a shareholder loan facility, as of end 2023. KPI has access to a notional pooling facility at Pertamina's group level, which stood at USD1.3 billion at end-2023.

Issuer Profile

KPI owns and controls almost all the refineries in Indonesia, with capacity of over 1mmboed as of end-2023.

Date of Relevant Committee

12 March 2024

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

KPI's IDR is directly linked to its parent, Pertamina. Any change in Pertamina's IDR will result in a similar revision in KPI's IDR.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/topics/esg/products#esg-relevance-scores. (ends)