Moody's assigns Baa2 to Pertamina's MTN drawdown

(Singapore, February 03, 2021) -- Moody's Investors Service has assigned a Baa2 rating to the proposed senior unsecured USD notes to be issued by Pertamina (Persero) (P.T.).

The rating outlook is stable.

The notes will be issued under Pertamina's global medium-term note program, which is rated (P)Baa2, and the proceeds will be used to finance capital expenditure and for general corporate purposes.

"Pertamina's Baa2 issuer rating reflects its strategically important role as Indonesia's (Baa2 stable) national oil and gas company, as well as its standalone credit quality as captured in its baa3 baseline credit assessment (BCA)," says Hui Ting Sim, a Moody's Analyst.

RATINGS RATIONALE

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, which is a wholly-owned subsidiary of the Indonesian government, is also 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's baa3 BCA also reflects Moody's expectation that its credit metrics will remain supportive of its standalone credit strength over the next 12-18 months despite its large capital spending budget. Moody's projections assume that the company will spend about $6 billion per year from 2021-22 while the company has budgeted for significantly higher amounts. This is based on Pertamina's track record of financial prudence and spending significantly lower than its budgeted capital spending.

Over the next 12-18 months, Moody's expects Pertamina's adjusted retained cash flow to net debt and EBITDA to interest will be around 35%-45% and 7.5x-8.5x, respectively. These projections incorporate Moody's assumptions of (1) Brent prices averaging $45 per barrel in 2021 and $55 per barrel in 2022; (2) stronger domestic demand for transportation fuels compared to 2020 as movement restrictions ease; and (3) timely receipts of government compensation at Pertamina.

ESG CONSIDERATIONS

In terms of environmental, social and governance factors, the ratings consider the following:

Pertamina's issuer rating considers the high environmental risk that the company is exposed to through its integrated oil and gas operations. The global trend towards decarbonization will reduce demand for hydrocarbons and threaten earnings of oil and gas producers over the medium term. Nevertheless, the risk is mitigated to some extent by Pertamina's strong market position within Indonesia. The country remains dependent on crude and refined fuel imports to meet its growing energy needs.

Oil spills at Pertamina's upstream and midstream operations resulting in environmental pollution had occurred in 2018 and 2019. However, Pertamina has undertaken environmental recovery efforts and a comprehensive review to improve its operational standards.

In terms of social factors, integrated oil and gas companies such as Pertamina are typically exposed to moderate social risks. The company had to offer financial compensation to communities that were adversely affected by the oil spills caused by its operations. Nonetheless, we expect the amounts disbursed will not be material to the extent of hurting Pertamina's financial profile.

As for governance factors, the 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 RATING

Pertamina's rating outlook is stable, reflecting the stable outlook for Indonesia's sovereign rating, as well as Moody's expectation that Pertamina will manage its capital spending such that its financial metrics will remain supportive of its BCA.

Moody's will upgrade Pertamina's Baa2 issuer rating if (1) Moody's upgrades the Indonesian government's Baa2 sovereign rating; (2) the company's BCA is maintained at least at the current baa3 level; and (3) the government 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.

Moody's will consider upgrading Pertamina's BCA to baa2 if the company (1) establishes a track record of increasing petroleum product prices in a rising oil price environment, which will demonstrate the resilience of its downstream earnings; and (2) demonstrates sustained improvements in its credit profile and maintains financial discipline as it pursues growth.

Credit metrics indicative of an improvement in Pertamina's BCA include retained cash flow (RCF)/net debt exceeding 25%-30%, adjusted debt/capital below 45%-50%, and EBITDA/interest exceeding 6x, all on a sustained basis.

Pertamina's issuer rating may face downward pressure if (1) Indonesia's sovereign rating is lowered; (2) the company's BCA falls below ba2; or (3) government ownership of Pertamina falls, or government control is reduced by some other means; factors which would require 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 (1) changes in the fuel pricing framework that result in a substantial erosion of the company's earnings; (2) large debt-funded expansions, acquisitions or dividend payments; or (3) 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 this rating 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)