Moody's affirms Pertamina's rating at Baa3; BCA lowered to ba1
Monday, June 29 2015 - 10:09 AM WIB
The outlook on the ratings remain stable.
"The BCA change to ba1 from baa3 was driven by our expectation that the company's fundamental credit quality will decline over the next two years as it increases borrowings amid earnings deterioration to fund its capital investment plan. We anticipate its retained cash flow to net debt ratio will fall to 13% -14% and adjusted debt to capitalization ratio will rise to 55%-60%, which will breach our downgrade thresholds," says Vikas Halan, a Moody's Vice President and Senior Credit Officer.
Even though Pertamina has halved its capex plans over the next four years, it still has an aggressive investment program of $25.8 billion for 2015-18, compared to $16.9 billion in the preceding four years.
The company plans to channel most of its spending to grow its upstream exploration and production business and geothermal development.
Pertamina's large capex plan also comes at a time when oil prices are historically low. Given Moody's assumption of Brent crude averaging $55 per barrel this year, we believe Pertamina will see a 20% decline in EBITDA in 2015.
As such, Pertamina will likely generate annual negative free cash flow of about $3 billion over the next few years and will require incremental borrowing to make up the shortfall over the same period.
"However, there is no change in Pertamina's final Baa3 issuer rating because it incorporates its BCA of ba1 and one notch of uplift reflecting our expectation of high support from the Indonesian government and very high dependence between the two. We believe that even if Pertamina's BCA declines to ba2, the company's final rating will likely remain at Baa3 given our assessment of high expected sovereign support," says Halan.
Pertamina's BCA also reflects the company's strategically-important position as Indonesia's national integrated oil and gas company. It is a significant contributor of the country's upstream production and also accounts for all the refining capacity in Indonesia. As the market leader, the company benefits from its low cost operations.
At the same time, the rating takes into account Pertamina's moderate leverage profile and exposure to moderate regulatory risks associated with a transitioning framework, and execution risks associated with its increasing investments.
As at end-2014, Pertamina had consolidated cash balance of $3.8 billion compared to debt maturing within the next 12 months of $5.8 billion. Given our projection of its 2015 cash flow from operations of around $2 billion and capex requirement of $4.4 billion, we expect the company to remain reliant on external financing to fund the bulk of the difference.
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.
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 an unexpectedly protracted or steep decline in oil prices or the company's production ramp up is slower than we expect.
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)