Fitch revises outlook on Indonesia's Pertamina to positive; Affirms 'BBB-'
Thursday, December 22 2016 - 10:07 AM WIB
The rating action follows Fitch's revision of the Outlook on Indonesian's sovereign to Positive from Stable on 21 December 2016 (see Fitch Revised Indonesia's Outlook to Positive; Affirms at 'BBB-').
Rating Equalised with Sovereign: Pertamina's ratings are equalised with that of its parent, the Republic of Indonesia (BBB-/Positive), as per Fitch's Parent and Subsidiary Rating Linkage methodology. This reflects the strong operational and strategic linkages between the parent and the company. Pertamina is Indonesia's sole refiner and dominant petroleum product retailer. 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 Obligation: Pertamina performs a public service obligation (PSO) by selling certain petroleum products below market price. The government makes up the shortfall via subsidies to ensure Pertamina receives a predetermined margin on products sold under the PSO. These subsidies are important for Pertamina to remain profitable, especially if crude oil prices rise. Pertamina's downstream operations accounted for about nearly two-thirds of its EBITDA during 9M16.
Subsidy Reform Risk: Pertamina's subsidy requirement has been falling over the last two years due to the government's fuel-price reforms along with falling crude oil prices. The company received a subsidy of USD1.8bn during 9M16, compared with a USD2.4bn subsidy in the previous period (2015: USD3.3bn; 2014: USD12.5bn). The state removed subsidies on gasoline in January 2015 and changed the subsidy mechanism for diesel from variable to fixed in nature.
The fixed diesel subsidy formula can increase the risk of Pertamina not recovering its costs if fuel retail prices are not revised adequately or at regular intervals. However, the government continues to set the prices for key fuels, such as gasoline and diesel, with regular revisions, despite the subsidy reforms. This highlights the sensitive nature of fuel prices in Indonesia, which has a history of social unrest in response to price increases. Fitch will closely monitor reform developments, particularly if fuel continues 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 to increase oil and gas production and expand its refining capacity. The high capex is likely to significantly increase Pertamina's debt levels, which along with weaker profitability due to low oil prices, is likely to drive up leverage. Pertamina externally sources around 40%-50% of its net crude requirement for its refineries and about 45% of its refined products. Increasing upstream production and improving refinery capacity augmentation remains important for the expansion of Pertamina's profitability and containing the state's subsidy expenses. We expect Pertamina's oil and gas production to continue rising by around 15% over the next three years (2015:11%), supported by these investments.
Moderate Financial Profile: We expect Pertamina's financial profile to remain moderate, driven by expectations of high debt levels. The company's leverage is likely to increase to around 3x over the medium-term, although FFO net leverage should improve to around 1.5x by end-2016 (2015:2x). The improved financial metrics during 2016 are mainly due to Pertamina's strong downstream profitability and lower capex. However, we expect capex to increase to around USD6bn from 2017.
Strong Liquidity: Pertamina's liquidity remains strong, with a cash balance of USD5.8bn as of end-September 2016 (end-2015: USD3.1bn) and strong access to funding. Fitch believes Pertamina will maintain its 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.
Weak 'BBB-' 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 moderate financial profile. Pertamina is one of Indonesia's largest crude oil producers, accounting for over 20% of the country's output. Overall, Fitch considers Pertamina's standalone credit profile to be a weak 'BBB'. (ends)