Moody's affirms Pertamina's Baa3 rating; outlook stable

(Singapore, December 16, 2015) -- Moody's Investors Service has affirmed the Baa3 issuer and senior unsecured bond ratings of Pertamina (Persero) (P.T.). (Pertamina). At the same time, Moody's has also affirmed the (P)Baa3 rating of Pertmina's $10 billion Global Medium-Term Note program.

The outlook on the ratings is stable.

The rating actions follows sharp reduction in Moody's oil price assumptions in light of continuing oversupply in the global oil markets. Moody's now assumes the Brent crude, the international benchmark, to average $43 per barrel and US$ 48 per barrel in 2016 and 2017 respectively. This marks a $10 per barrel and $12 per barrel reduction from its previous assumptions for 2016 and 2017 respectively.

Pertamina's Baa3 rating incorporates its baseline credit assessment (BCA) of ba1, and one notch of uplift reflecting expectation of high support from the Indonesian government (Baa3, stable) and very high dependence between the two, under Moody's Joint Default Analysis approach.

'The affirmation of Pertamina's ratings reflects our expectation that the deterioration of company's credit metrics arising from low oil prices, albeit material, will be within the tolerance levels of its ratings. The affirmation also incorporates our expectation that the company will not materially increase its capital outflows from current levels over the next 2- 3 years,' says Vikas Halan, a Moody's Vice President and Senior Credit Officer.

For the 9 months ended September 2015, Pertamina has been able to increase its oil & gas production volumes by nearly 10%, which has partly mitigated the impact of the lower oil prices. The company expects its production to increase by about 15-20% over the next 2-3 years, which will also partly mitigate further declines in oil prices.

Pertamina also has a substantial downstream refining and marketing business, which has historically contributed over 90% to revenue but less than 5% to its EBITDA. As regional refining margins remain healthy and Pertamina improves its refinery efficiency, the contribution from its downstream refining business will improve.

The outlook on the ratings is stable, reflecting the stable outlook of Indonesia's sovereign rating. At the same time, Moody's expects Pertamina to manage its capital expenditure and investment programs in such a way that its financial metrics will remain supportive of its ratings.

Given the close link between Pertamina's rating and the sovereign rating, an upgrade of the latter would likely trigger an upgrade of the company.

An upgrade of BCA to baa3 in the current oil price environment is unlikely. We will consider changing Pertamina's BCA to baa3 if the company demonstrates sustained improvements in its credit profile and maintains financial discipline as it pursues growth. Specific indicators include retained cash flow to net debt exceeding 20% and EBIT to interest above 4x on a consistent basis.

Pertamina's issuer rating would be under negative pressure, if a) its BCA falls below ba2; or b) Indonesia's sovereign rating is lowered; or c) there is change in relationship, albeit unexpected, between Pertamina and the Indonesian government resulting in lower expectation of extraordinary support.

The BCA may come under additional downward pressure if Pertamina makes any debt-funded acquisitions or its earnings and cash flow decline more than we expect owing to steeper decline in oil prices or the company's production ramp up is slower than we expect. The BCA may also face downward pressure if the company fails to reduce payments to its shareholder in line with the declining profits or increase its capital investments beyond the current levels.

Credit metrics indicative of such downward pressure include retained cash flow to net debt falling below 10%-15%, EBIT to interest declining below 2x-2.5x on a sustained basis.

The principal methodology used in these ratings was Global Integrated Oil & Gas Industry published in April 2014. Other methodologies used include the Government-Related Issuers published in October 2014. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

PT Pertamina (Persero) is a 100% Indonesian government-owned, fully-integrated oil and gas corporation, with operations in upstream oil, gas and geothermal exploration and production, downstream oil refining, marketing, distribution, transportation and trading of petroleum products. (ends)