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Fitch Revises Outlook on Indonesia's Pertamina to Positive; Affirms 'BBB-'
December 22, 2016 / 8:26 AM / in 7 months

Fitch Revises Outlook on Indonesia's Pertamina to Positive; Affirms 'BBB-'

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(The following statement was released by the rating agency) SINGAPORE, December 22 (Fitch) Fitch Ratings has revised the Outlook on Indonesia's PT Pertamina (Persero)'s (Pertamina) Long-Term Foreign-Currency Issuer Default Rating (IDR) to Positive from Stable and affirmed the IDR at 'BBB-'. Fitch also affirmed Pertamina's senior unsecured rating, USD10bn global medium-term note programme and existing senior unsecured notes at 'BBB-'. The rating action follows Fitch's revision of the Outlook on Indonesian's sovereign to Positive from Stable on 21 December 2016 (see <a href="https://www.fitchratings.com/site/pr/1016832">Fitch Revised Indonesia's Outlook to Positive; Affirms at 'BBB-' ). KEY RATING DRIVERS Rating Equalised with Sovereign: Pertamina's ratings are equalised with that of its parent, the Republic of Indonesia (BBB-/Positive), as per Fitch's Parent and Subsidiary Rating Linkage methodology. This reflects the strong operational and strategic linkages between the parent and the company. Pertamina is Indonesia's sole refiner and dominant petroleum product retailer. It remains one of the most important state-owned entities in executing Indonesia's national energy policy. Fitch assesses its standalone credit profile at 'BBB-'. Public Service Obligation: Pertamina performs a public service obligation (PSO) by selling certain petroleum products below market price. The government makes up the shortfall via subsidies to ensure Pertamina receives a predetermined margin on products sold under the PSO. These subsidies are important for Pertamina to remain profitable, especially if crude oil prices rise. Pertamina's downstream operations accounted for about nearly two-thirds of its EBITDA during 9M16. Subsidy Reform Risk: Pertamina's subsidy requirement has been falling over the last two years due to the government's fuel-price reforms along with falling crude oil prices. The company received a subsidy of USD1.8bn during 9M16, compared with a USD2.4bn subsidy in the previous period (2015: USD3.3bn; 2014: USD12.5bn). The state removed subsidies on gasoline in January 2015 and changed the subsidy mechanism for diesel from variable to fixed in nature. The fixed diesel subsidy formula can increase the risk of Pertamina not recovering its costs if fuel retail prices are not revised adequately or at regular intervals. However, the government continues to set the prices for key fuels, such as gasoline and diesel, with regular revisions, despite the subsidy reforms. This highlights the sensitive nature of fuel prices in Indonesia, which has a history of social unrest in response to price increases. Fitch will closely monitor reform developments, particularly if fuel continues to be sold at commercial prices in a high price environment. Large Capex and Investments: Pertamina expects to spend around USD17bn over the next three years on capex to increase oil and gas production and expand its refining capacity. The high capex is likely to significantly increase Pertamina's debt levels, which along with weaker profitability due to low oil prices, is likely to drive up leverage. Pertamina externally sources around 40%-50% of its net crude requirement for its refineries and about 45% of its refined products. Increasing upstream production and improving refinery capacity augmentation remains important for the expansion of Pertamina's profitability and containing the state's subsidy expenses. We expect Pertamina's oil and gas production to continue rising by around 15% over the next three years (2015:11%), supported by these investments. Moderate Financial Profile: We expect Pertamina's financial profile to remain moderate, driven by expectations of high debt levels. The company's leverage is likely to increase to around 3x over the medium-term, although FFO net leverage should improve to around 1.5x by end-2016 (2015:2x). The improved financial metrics during 2016 are mainly due to Pertamina's strong downstream profitability and lower capex. However, we expect capex to increase to around USD6bn from 2017. Strong Liquidity: Pertamina's liquidity remains strong, with a cash balance of USD5.8bn as of end-September 2016 (end-2015: USD3.1bn) and strong access to funding. Fitch believes Pertamina will maintain its strong access to bank and bond markets given its state linkages, and that it will be able to meet its debt obligations in this period and obtain funding for expansion. Weak 'BBB-' Standalone Profile: Pertamina's standalone credit strength reflects its vertically integrated operations, large scale and dominant position in Indonesia's retail fuel market. However, its operating strengths are offset by its short upstream production position, small mid-stream capacity relative to its overall petroleum product sales and moderate financial profile. Pertamina is one of Indonesia's largest crude oil producers, accounting for over 20% of the country's output. Overall, Fitch considers Pertamina's standalone credit profile to be a weak 'BBB'. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for Pertamina include: - Oil prices (Brent) to average USD45 a barrel in 2017, USD55 a barrel in 2018 and USD60 a barrel in 2019, in line with the Fitch oil and gas price deck. - Present subsidy formulas for diesel, kerosene and LPG to continue. - Downstream volume growth of around 4% over the medium term. - Growth in oil and gas production of around 15% in 2017 and 2018. RATING SENSITIVITIES Positive: Developments that may, individually or collectively, lead to positive rating action include positive rating action on Indonesia's sovereign, provided there is no weakening of the company's legal, operational and strategic ties with the government. Negative: Developments that may, individually or collectively, lead to negative rating action include: - negative rating action on the sovereign, provided the company's standalone profile also weakens. Fitch would lower Pertamina's standalone profile if FFO-adjusted net leverage is sustained above 4.0x due to higher capex, large M&A or if Pertamina is not fully compensated under the subsidy formula; - weakening links with the state, although Fitch considers this to be unlikely in the medium term. For the sovereign rating of Indonesia, the following sensitivities were outlined by Fitch in its Rating Action Commentary of 21 December 2016: The main factors that, individually or collectively, could trigger positive rating action are: - A strengthening of the external balances, making Indonesia less vulnerable to sudden changes in foreign-investor sentiment, for instance through lower commodity export dependence or structurally higher foreign direct investment inflows. - Continued improvement of the business environment and governance standards. - Maintenance of sustainable GDP growth at a higher level than rating peers. The rating Outlooks are Positive. Hence, Fitch does not anticipate a high probability of negative action over the forecast period. However, the main factors that could see the ratings revert to Stable Outlook are: - A sharp and sustained external shock to foreign and/or domestic investors' confidence with the potential to cause external financing difficulties. - A rise in the public debt burden, for example caused by breaching the budget-deficit ceiling. Contact: Primary Analyst Muralidharan R Director +65 6796 7236 Fitch Ratings Singapore Pte Ltd One Raffles Quay South Tower #22-11 Singapore 048583 Secondary Analyst Rachna Jain Associate Director +65 6796 7242 Committee Chairperson Sajal Kishore Senior Director +61 2 8256 0321 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016) here Parent and Subsidiary Rating Linkage (pub. 31 Aug 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1016920 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. 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