(Fitch Ratings - Jakarta - 04 May 2025)--Fitch Ratings has assigned a rating of 'BBB' to PT Pertamina Hulu Energi's (PHE, BBB/Stable) USD3 billion global medium-term note programme and the proposed US dollar notes under the programme. The notes under the programme will constitute senior unsecured obligations of PHE and the proceeds will be used for capex and other corporate purposes.
PHE is rated on a standalone basis, as its Standalone Credit Profile (SCP) of 'bbb' is on a par with the Issuer Default Rating (IDR) of its parent, PT Pertamina (Persero) (Pertamina, BBB/Stable). PHE's SCP is underpinned by its robust business profile, driven by its production scale, healthy reserves and solid financial metrics. These strengths are partly offset by PHE's limited diversification outside Indonesia, and our expectation that the financial profile will weaken due to capex exceeding cash flow from operations (CFO) in the next three years.
PHE's IDR would be equalised with Pertamina's if the SCP weakens, based on our assessment of high legal, strategic and operational incentives for the parent to lend support, under Fitch's Parent and Subsidiary Linkage Rating Criteria. Alternatively, PHE's IDR will be constrained by Pertamina's rating even if the SCP improves, due to the absence of legal ringfencing and Pertamina's control over PHE's cash flow.
Key Rating Drivers
Leverage to Worsen: We expect PHE's EBITDA net leverage to deteriorate to above 1.5x by 2027 (2024: 0.1x), as we forecast lower EBITDA and higher capex. The forecast EBITDA decline is due to our assumption of lower oil prices of USD65 per barrel over 2025-2027, based on Fitch's price deck. Our forecast that capex will exceed CFO, along with sustained dividends, also drives our estimates of increasingly negative FCF and rising debt. However, we expect PHE to maintain a modest leverage profile consistent with its SCP.
High Output, Likely to Grow: We forecast production to grow at low single-digit rates in the next three years. Higher domestic oil and gas output is a priority for the Indonesian government, but many of PHE's assets face a natural decline in output. We expect the group to increase spending on field development and acquisitions in the next few years to achieve production growth. PHE's output was high at around 1 million barrels of oil equivalent (boe) per day, with an oil to gas split of 53:47 in 2024.
Healthy Reserves but Need Replenishing: PHE had proved oil and gas reserves of 2.4 billion boe at end-2024, without adjusting for the government's share under its production contracts, which places it comfortably within the 'bbb' category for reserve base as per Fitch's Rating Navigator for the sector. However, PHE's reported reserve life stood at 7.7 years, lower than that of many similarly rated peers. This indicates that PHE needs to continue exploration or undertake M&A to maintain long-term output.
PHE increased its reserves in 2023 and 2024, and we expect the group to maintain its reserve life with higher capex.
Risk from Weak Oil Prices: Crude oil prices fell sharply in April 2025 and we see risk that they could fall below our 2025 price assumption for the Brent benchmark of USD65 per barrel. Lower crude oil prices will affect PHE's earnings from its oil output, as well as a majority of gas sales volumes where prices are linked to oil benchmarks. We think PHE's SCP has ample headroom to withstand lower oil prices in 2025. Should weaker prices persist, we believe the group could delay potential M&As and cut dividends to support its financial profile.
Limited International Diversification: PHE derives around 80% of its output from Indonesia, where it is exposed to regulatory risk that is higher than in developed economies with more established policy frameworks. However, we think the risk is mitigated by the government's focus on improving energy security and PHE's dominant position as Indonesia's largest oil and gas producer.
The government has allowed PHE to change the structure of several production sharing contracts, to improve profitability. We see lower risk for the oil and gas sector in Indonesia compared with mining and other natural resources, due to its higher importance to the state.
Programme and Bond Rating: PHE's notes programme and proposed bonds are rated at the same level as the IDR, in the absence of material subordination concerns. PHE does not have any secured debt. In addition, key subsidiaries are almost entirely owned and PHE exerts a high degree of control over them. This mitigates structural subordination risk in the absence of upstream guarantees from any subsidiaries.
Peer Analysis
PTT Exploration and Production Public Company Limited (PTTEP, BBB+/Stable), Thailand's national oil and gas producer, has an SCP of 'bbb', at the same level as that of PHE. PTTEP is smaller than PHE in terms of production volumes and proved reserves, with a lower reserve life. However, PTTEP's credit profile benefits from a higher share of gas in total output, which reduces earnings volatility, and a more geographically diversified asset portfolio.
Australia-listed Santos Limited (BBB/Stable) is also smaller than PHE in terms of daily output and reserves. Its large share of EBITDA from Papua New Guinea exposes Santos to higher regulatory risks and a weaker operating environment than PHE, in our view. However, these weaknesses are offset by Santos' significant share of revenues from gas sales in Australia, which are based on long-term fixed-price contracts that lend revenue stability.
Oil and Natural Gas Corporation Limited (ONGC, BBB-/Stable) is India's largest oil and gas producer, whose SCP of 'bbb+' benefits from vertical integration with significant downstream operations for refining, marketing and petrochemicals. Additionally, its proved reserve size and life are higher than that of PHE. These factors underpin ONGC's higher SCP.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
- Average Brent price of USD65/bbl over 2025-2027, based on Fitch's price deck;
- Total oil and gas production growth of 2% in 2025, 3% in 2026 and 4% in 2027;
- EBITDA per unit production declines to USD12/boe by 2027, from USD15/boe in 2025 (2024: USD19/boe);
- Average annual capex, including acquisition-related spending, of USD5.2 billion over 2025-2027;
- Average annual dividend payment of USD1.4 billion during 2025-2027.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:
- A downgrade in Pertamina's IDR.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:
- Any upgrade in Pertamina's IDR, provided the parent's incentives to support PHE remain intact.
Liquidity and Debt Structure
PHE had cash of USD2.6 billion as of end-2024, against USD1.6 billion of loans due in 2025. The group also had around USD600 million of debt due in 2026 and USD400 million in 2027.
We forecast PHE will have negative FCF in the next three years, due to high capex and sustained dividend payments. As a result, PHE is likely to rely on refinancing and additional debt to meet its liquidity needs.
We believe PHE has robust banking access due to its solid business profile and domestic market position. PHE had an undrawn loan facility of over USD500 million as of end-2024 that we expect will be drawn by May 2025. PHE also obtained a revolving credit facility of USD800 million in March 2025. We believe PHE can also cut capex and dividends to manage cash flow, if required.
Issuer Profile
PHE is Indonesia's largest oil and gas exploration and production company, with an EBITDA of USD7 billion in 2024.
Date of Relevant Committee
17 April 2025
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
PHE's ratings are directly linked to those of its ultimate parent, Pertamina. Any change in Pertamina's ratings will result in a similar revision in PHE's ratings.
MACROECONOMIC ASSUMPTIONS AND SECTOR FORECASTS
Click here to access Fitch's latest quarterly Global Corporates Macro and Sector Forecasts data file which aggregates key data points used in our credit analysis. Fitch's macroeconomic forecasts, commodity price assumptions, default rate forecasts, sector key performance indicators and sector-level forecasts are among the data items included.
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 https://www.fitchratings.com/topics/esg/products#esg-relevance-scores. (ends)
