Moody's assigns first-time Baa2 issuer rating to Pertamina Hulu Energi; outlook stable

(Singapore, June 19, 2023)--Moody's Investors Service has assigned a first-time issuer rating of Baa2 to Pertamina Hulu Energi (P.T.) (PHE), a wholly-owned subsidiary of Pertamina (Persero) (P.T.) (Baa2 stable).

The rating outlook is stable.

RATINGS RATIONALE

"PHE's Baa2 long-term issuer rating reflects its strategic position as the upstream arm of Indonesia's national oil company, benefiting from a supportive regulatory regime; its high level of integration within the Pertamina group; some degree of cash flow visibility underpinned by its long-term contracts with counterparties that have strong credit quality; and its strong financial metrics and liquidity," says Rachel Chua, a Moody's Vice President and Senior Analyst.

"At the same time, these credit strengths are partly tempered by our expectation that PHE will have to make large dividend payments to Pertamina on a regular basis; the company's exposure to execution risk on the back of its aggressive expansion plans; its high degree of geographical concentration risk; as well as its moderate hydrocarbon reserve life compared with its global peers and exposure to oil price cyclicality," adds Chua.

PHE accounts for over 95% of the Pertamina group's total upstream production and is Indonesia's largest exploration and production company. The company controls the country's five largest oil blocks and four of the country's five largest gas blocks.

As of 31 December 2022, PHE held healthy proved reserves of 2,105 million barrels oil equivalent (mmboe). At an average daily production of 967 thousand barrels of oil equivalent per day (kboepd) in 2022, this translates to a proved reserve life of around six years.

The company benefits from a supportive regulatory regime where only Pertamina and the incumbent contractor can submit bids for expiring oil and gas blocks. Pertamina is entitled the right of first refusal to acquire expiring blocks if the incumbent contractor does not bid. Even if Pertamina does not submit a bid, it is still entitled to a 15% participating interest.

Moody's understands that PHE is the only upstream sub-holding company within the Pertamina group, and that there are no plans to create another upstream company within the group. As such, the regulatory regime that is supportive of Pertamina flows to PHE.

The agency also believes that PHE is strategically important within Pertamina's energy value chain. The company is the key earnings generator, accounting for over 75% of the group's earnings annually. There is also close business integration with the group as total offtake agreements with Pertamina's subsidiaries account for around 65% of PHE's consolidated revenue.

PHE is exposed to strong counterparty credit quality, given that the bulk of its offtake contracts are with the downstream refining company of the Pertamina group, which benefits from subsidy reimbursements from the Government of Indonesia (Baa2 stable).

The remainder of its offtake agreements are with other state-owned entities, such as PLN (Persero) (P.T.) (Baa2 stable) and other international oil majors.

Moody's projects PHE's debt level will likely rise over the next 1-2 years, given that Pertamina expects its subsidiaries to operate more independently going forward. Nonetheless, PHE's credit metrics will remain strong, with its adjusted debt/EBITDA at around 1.0x and its interest cover above 15.0x over the next few years.

At the same time, the company faces a high degree of geographical concentration risk, given that 80%-85% of its production volumes are derived within Indonesia. Its Indonesian assets collectively account for around 90% of PHE's revenues in 2022, which Moody's expects will continue going forward.

Although the company is inherently exposed to the inherent volatility of crude oil prices, 35% of its gas volumes are sold at fixed prices, which partly mitigates this risk.

PHE will likely have to make large dividend payments to its parent over the next few years, given that the company is the core earnings and cash flow generator within the group. It expects to upstream dividends amounting to about $8.5 billion over the next three years, subject to oil prices staying at a healthy level. Higher dividends upstreamed would be credit negative.

The company's liquidity is excellent. As of 31 December 2022, it held cash and cash equivalents of around $4.46 billion, against short-term debt (including lease liabilities) of $695 million that will come due over the next 12 months. The company also signed a syndicated bank loan of $1.5 billion in May 2023.

The rating outlook is stable, reflecting Moody's expectation that PHE will continue to generate healthy cash flows from its producing assets, such that it maintains its strong financial profile. The agency also expects the company to maintain a prudent approach towards investments, even as it pursues growth.

In terms of environmental, social and governance (ESG) factors, PHE's credit impact score of CIS-2 indicates that ESG considerations have limited impact on the company's rating. This score mainly reflects its exposure to environmental and social risks stemming from its operations within the oil exploration and production sector, as well as governance risk, mainly considering PHE's full ownership by Pertamina, which is in turn wholly owned by the Indonesian government. While PHE does not have publicly committed financial policies, it has nonetheless maintained fairly conservative credit metrics.

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

PHE's Baa2 issuer rating is capped at the Baa2 issuer rating of its parent, Pertamina, which is also at Indonesia sovereign rating level. Given that PHE's key customers are largely entities within the Pertamina group, and that its operations are primarily within Indonesia, Moody's will not consider further positive rating actions unless the ratings for Pertamina and the country are upgraded.

Moody's will downgrade PHE's rating if Indonesia's sovereign rating is downgraded or if Pertamina's issuer rating is downgraded.

Downward rating pressure would also arise if the relationship and/or linkage between PHE and the Pertamina group of companies changes.

Downward pressure on PHE's rating could also develop if (1) its operating performance weakens, with a decline in production or a significant increase in production cost; (2) oil prices remain low over a sustained period of time; or (3) the company adopts a more aggressive approach towards capital spending, acquisitions or dividends. Specific indicators that Moody's would consider for a downgrade include retained cash flow (RCF)/adjusted debt below 20%, adjusted debt/EBITDA above 1.5x-2.0x and EBITDA/interest cover below 10x.

The principal methodology used in these ratings was Independent Exploration and Production published in December 2022 and available at https://ratings.moodys.com/rmc-documents/396736. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.

Pertamina Hulu Energi (P.T.) (PHE) is an upstream company engaged in the exploration and production (E&P) of crude oil and natural gas. Established by Pertamina in 1989, PHE is today the largest upstream E&P company in Indonesia. Since its appointment as Pertamina's sub-holding company for upstream operations in 2021, PHE has acquired all shares owned by Pertamina in its upstream subsidiaries. In 2022, the company reported an average daily production of 967,000 barrels of oil equivalent per day (boed), with a balanced proportion of oil (53.2%) and gas (46.8%), and maintained a proved reserves of 2,105 million boe.

As of 31 May 2023, PHE is a wholly-owned subsidiary of Pertamina. (ends)