Regional LNG: Moody's: No rating impact on Petronas and Petronas LNG from sovereign rating action

(Singapore, November 20, 2013) -- Moody's Investors Service says that the A1 issuer and senior unsecured ratings of Petroliam Nasional Berhad (PETRONAS) and the A3 issuer rating of PETRONAS LNG Limited (PLL) remain unchanged following Moody's revision of Malaysia's A3 sovereign rating outlook to positive from stable on 20 November 2013.

The A1 senior unsecured ratings of PETRONAS Global Sukuk Limited and PETRONAS Capital Limited also remain unchanged.

"PETRONAS' A1 issuer rating and baseline credit assessment (BCA) -- already positioned two notches above Malaysia's sovereign rating -- reflect its standalone credit strength and do not incorporate any uplift from the government's very high support," says Vikas Halan, a Moody's Vice President and Senior Analyst.

"PETRONAS' ratings are unlikely to follow if the sovereign is upgraded. As such, the ratings outlook does not move in tandem with the outlook on the sovereign rating," adds Halan, who is also the Lead Analyst for both PETRONAS and PLL.

The key rating drivers for PETRONAS are its high level of financial flexibility, solid liquidity, conservative financial profile, high degree of operational integration, and profitable domestic production-sharing contracts.

At the same time, these strengths are balanced by 1) the geographical concentration in Malaysia of the company's reserves, 2) its small-scale downstream operations, when compared to the international integrated oil and gas majors, and 3) its exposure to high geo-political risk because of its operations in South Sudan and Iraq.

The possibility of a rating upgrade for PETRONAS is limited, given the very high inter-dependence between it and the government, as well as the execution risks related to the company's overseas acquisitions.

Downward rating pressure could arise if PETRONAS were to face any significant disappointments in developing its new investments. Moreover, a weakening of its financial and liquidity profiles -- as a result of substantial debt funding for its existing investments, or material acquisitions leading to a gross adjusted debt to total capitalization ratio above 35-40% -- could also pressure the rating.

"Unlike its ultimate parent PETRONAS, PLL is not a government-related issuer as there is no direct government ownership. Its A3 issuer rating does not benefit from any sovereign-related ratings uplift and hence the sovereign outlook change has no impact on its ratings," says Halan.

PLL's A3 issuer rating is positioned two notches below PETRONAS' A1 rating to reflect PLL's full ownership by, and strong operational and financial integration with PETRONAS. It also takes into consideration the company's 1) small size and 2) earnings and cash flow volatility from its spot trading activities.

Upward pressure on PLL's rating in the next 12-18 months is unlikely because of the strong ratings linkages to that of its ultimate parent, PETRONAS. However, Moody's would consider an upgrade if PETRONAS' rating is upgraded.

Downward rating pressure may emerge if: 1) there is any reduction in PETRONAS' supervision of and operational and financial support to PLL; 2) there is any decrease in PETRONAS' ownership of PLL; 3) PETRONAS' issuer rating is downgraded; or 4) there is a material increase in PLL's risk appetite.

The principal methodology used in these ratings was the Global Integrated Oil & Gas Industry Methodology published in November 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

PLL's ratings were assigned by evaluating factors that Moody's considers relevant to the credit profile of the issuer, such as the company's (i) business risk and competitive position compared with others within the industry; (ii) capital structure and financial risk; (iii) projected performance over the near to intermediate term; and (iv) management's track record and tolerance for risk. Moody's compared these attributes against other issuers both within and outside PLL's core industry and believes PLL's ratings are comparable to those of other issuers with similar credit risk.

Petroliam Nasional Berhad (PETRONAS) is a 100% Malaysian government-owned oil and gas company, with operations spanning upstream oil and gas exploration and production, downstream oil refining, marketing and distribution of petroleum products, as well as trading in oil, petroleum and petrochemicals products.

PETRONAS LNG Limited (PLL) is a private liquefied natural gas (LNG) trading company that is fully owned by Petroliam Nasional Berhad. (ends)