Moody's affirms Pertamina's Baa2 ratings; outlook stable

Singapore, January 13, 2022 -- Moody's Investors Service has affirmed Pertamina (Persero) (P.T.)'s Baa2 issuer and senior unsecured bond ratings, (P)Baa2 senior unsecured medium-term note (MTN) program ratings and its Baseline Credit Assessment (BCA) of baa3.

The rating outlook remains stable.

"The rating affirmation reflects our expectation that Pertamina will maintain conservative credit metrics as it prudently grows its core businesses as well as diversify into cleaner energy," says Hui Ting Sim, a Moody's Analyst.

"The recent environment of higher oil prices has weighed on downstream earnings at Pertamina as the company is required to sell certain fuels at government-mandated prices. However, the company expects to receive government reimbursements for the revenue shortfall," adds Sim.

RATINGS RATIONALE

Pertamina's Baa2 issuer rating reflects: (1) its BCA of baa3; and (2) one notch of uplift based on Moody's expectation of a very high likelihood of extraordinary support for the company from the government of Indonesia (Baa2 stable) in times of need.

Moody's expects Pertamina's credit metrics to remain supportive of its BCA based on the rating agency's medium-term Brent crude price assumptions of $50-$70 per barrel. Moody's estimates that Pertamina will incur losses at its downstream segment if crude prices are above $60 per barrel because the company has to sell certain petroleum products domestically at subsidized prices. During the first nine months of 2021, Pertamina's EBITDA fell 23% year on year to $4.4 billion even though Brent crude prices increased by around 60% during the same period.

Nevertheless, the company expects these losses to be partly offset by subsidy and compensation reimbursements from the government. Since 2018, the government has reimbursed $2.7 billion to Pertamina for the revenue shortfall arising from the difference between the government-regulated sale price and market-linked price for specific types of fuel. Pertamina estimates that government compensation for 2021 will be at least $1.5 billion. While these reimbursements will be an immediate boost to earnings, they will not be immediately accretive to cash inflow because they will be paid by installments on a deferred basis.

The takeover of Rokan oil block by Pertamina in August 2021 will also boost production and upstream earnings. According to the company, production at Rokan block in November 2021 averaged around 160 thousand barrels of oil equivalent per day per day (kboepd). The Rokan block is under a gross split scheme, which entails higher execution risk as it will require Pertamina to prudently control costs and investments to generate a profit. Moody's forecasts Pertamina's average daily production will increase to around 1,000 kboepd in 2022 from 866 kboepd in the 9 months of 2021 following the addition of Rokan block.

Pertamina has planned for significant investments during 2022-24 to scale up its core businesses and expand its presence in cleaner energy. However, Moody's projections have only assumed that the company will spend about $6 billion per year from 2022-24 given Pertamina's track record of financial prudence and spending significantly lower than its budgeted capital spending. Moody's expects Pertamina adjusted retained cash flow to net debt and EBITDA to interest to be around 40%-50% and 7.5x-8.5x, respectively, over the next 12-18 months. Pertamina's credit metrics will be much weaker than Moody's projections should the company execute fully on its ambitious growth plans.

Pertamina plays a crucial role in oil and gas exploration in Indonesia, and accounts for substantially all of the country's refineries, fuel marketing stations and gas pipelines. The company is a wholly-owned subsidiary of the Indonesian government and mandated to execute on Indonesia's hydrocarbon agenda and safeguard energy security. As such, Pertamina's strategies and budget are closely supervised by the government. These factors support Moody's assessment of a very high likelihood of government support in a distressed situation, and very high interdependence between the two parties.

The baa3 BCA reflects Pertamina's integrated oil and gas operations with significant scale in upstream production and downstream businesses. At the same time, Pertamina's strengths are balanced by its exposure to an evolving regulatory environment in Indonesia and a high degree of execution risk associated with its sizable investment plan.

Pertamina has excellent liquidity. As of 30 September 2021, the company held cash and cash equivalents of $10.9 billion against short-term debt of $3.3 billion.

ESG CONSIDERATIONS

Pertamina is exposed to high environmental and social risks inherent to its core oil and gas operations.

The Baa2 issuer rating incorporates Pertamina's status as a 100% government-owned company, the government practice of appointing all of Pertamina's board of commissioners and its significant control over the company's operational and financial policies. Despite being unlisted, Pertamina publishes quarterly financial statements and maintains a reasonable degree of transparency into its operating performance. Even though Pertamina does not have publicly committed financial policies, it has maintained conservative credit metrics and excellent liquidity.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Pertamina's rating outlook is stable, reflecting the stable outlook on Indonesia's sovereign rating.

Moody's will upgrade Pertamina's Baa2 issuer rating if the Indonesian government's sovereign rating is upgraded to Baa1; the company's BCA is maintained at least at the current baa3 level; and the support assessment incorporated in the rating remains unchanged.

An upgrade of the BCA alone will not result in an upgrade of Pertamina's issuer rating.

Pertamina's BCA is unlikely to be upgraded in the near term given the company's ambitious growth plans to expand or upgrade its downstream facilities as well as diversify into cleaner businesses. Moody's will consider upgrading Pertamina's BCA to baa2 after the company executes on its plans and reaches a stable phase of operations, as well as establishes a track record of increasing petroleum product prices in a rising oil price environment, which will support its downstream earnings.

Credit metrics indicative of an improvement in Pertamina's BCA include retained cash flow (RCF)/net debt exceeding 25%-30% and EBITDA/interest exceeding 6x, all on a sustained basis.

Pertamina's issuer rating may face downward pressure if Indonesia's sovereign rating is lowered; the company's BCA falls below ba2; or the government's stake in Pertamina declines or government control is reduced by some other means, resulting in a reassessment of the level of government support incorporated into Pertamina's ratings.

Downward pressure on Pertamina's BCA could develop if its credit metrics deteriorate because of changes in the fuel pricing or reimbursement framework, which result in a substantial erosion of the company's earnings; large debt-funded expansions, acquisitions or dividend payments; or a sustained decline in margins or efficiency of operations.

Credit metrics indicative of a deterioration in its BCA to ba1 include RCF/net debt below 20%, adjusted debt/capital above 55% or EBITDA/interest below 5x.

The methodologies used in these ratings were Integrated Oil and Gas Methodology published in September 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1172345, and Government-Related Issuers Methodology published in February 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1186207. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

Pertamina (Persero) (P.T.) is a 100% Indonesian government-owned, fully-integrated oil and gas corporation, with operations in upstream exploration and production, gas transmission and distribution, and downstream refining and marketing. (ends)