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Correction: Fitch Assigns 'BBB' Rating to Pertamina's Proposed USD Notes

· 02/05/2021 05:05
Correction: Fitch Assigns 'BBB' Rating to Pertamina's Proposed USD Notes

(The following statement was released by the rating agency)

Fitch Ratings-Singapore-05 February 2021:

This is a correction for a release on 2 February 2021. It updates the Corporate Rating Criteria, Country-Specific Treatment of Recovery Ratings Criteria, and Government-Related Entities Rating Criteria to versions that took effect from 21 December 2020, 5 January 2021, and 30 September 2020 respectively.

Fitch Ratings has assigned a rating of 'BBB' to PT Pertamina (Persero)'s (BBB/Stable) proposed US-dollar notes to be issued under its USD20 billion global medium-term note programme.

The proposed US-dollar notes are rated at the same level as Pertamina's senior unsecured debt as they will constitute its direct, unconditional, unsubordinated and unsecured obligations. Bond proceeds will be used for capex and general corporate purposes.

Pertamina's ratings are equalised with those of its parent, Indonesia (BBB/Stable), in line with Fitch's Government-Related Entities Rating Criteria. This is based on our assessment of 'Very Strong' linkages between Pertamina and the state as well as the state's 'Very Strong' incentive to provide support. We assess Pertamina's Standalone Credit Profile (SCP) at 'bbb-' due to its resilient financial profile through the oil-price cycle, low-cost upstream production and integrated operations. The SCP, however, is constrained by regulatory fuel-pricing risk.

Fitch expects Pertamina to maintain an adequate financial profile relative to its SCP over the next four to five years. We estimate that EBITDA declined by about 20% to USD6.5 billion in 2020 due to lower upstream production and retail fuel volume. We expect EBITDA to improve over the next four years on higher upstream volume following the addition of new upstream assets. We also expect retail volume to return to pre-pandemic levels by 2022 and stable retail prices.

Pertamina's credit metrics are not likely to be greatly affected by lower oil prices, especially as we expect the company's retail selling prices to remain stable through to 2024.

Key Rating Drivers

'Very Strong' State Linkages: Fitch believes Pertamina's status, ownership and control by the Indonesian sovereign is 'Very Strong'. The state fully owns Pertamina, appoints its board and senior management and directs and approves its investments. Pertamina was also appointed as the state's holding company for the oil and gas sector. It functions as an important state vehicle in managing retail fuel prices and, hence, inflationary pressure, as it controls the majority of Indonesia's fuel distribution.

'Very Strong' State Support: We believe there is a high likelihood of state support for Pertamina. The government effectively controls the prices of the majority of fuels distributed by Pertamina, some of which are sold below market rates. The state, in turn, supports Pertamina through various mechanisms, including subsidy reimbursements for fuels sold under the public-service obligation mandate and compensation for the under-recovery of some fuels.

The state has awarded some of the larger oil and gas blocks upon the expiry of their production-sharing contracts to Pertamina and Fitch expects this practice to continue per government policy, which should improve Pertamina's business and financial profile.

'Very Strong' Incentive to Support: Fitch sees the socio-political implications of a default by Pertamina as 'Very Strong'. A default would damage Indonesia's energy security, including derailing the sizeable investments needed in the oil and gas sector, domestic fuel production and the state's ability to import crude oil and refined products. Indonesia, through Pertamina, imports a large share of its retailed final petroleum products and externally sources more than half of its crude requirements for refining.

We believe a default would also have 'Very Strong' financial consequences for the state, as Pertamina is one of Indonesia's key borrowers and an active international and domestic debt issuer.

Downstream Offsets Weaker Oil Prices: Pertamina has not cut its rupiah-based retail prices for most fuels since the start of 2020, despite the falling cost of purchasing refined products and crude. We assume the government is reluctant to lower retail fuel prices despite the economic downturn, as raising retail prices is politically sensitive. We expect Pertamina's higher downstream earnings to partly offset the decline in its upstream profit due to lower oil prices.

Lower Subsidies and Compensation: Fitch expects lower oil prices and stable selling prices to reduce the need for subsidy reimbursements and other forms of state compensation over the next two years. Reimbursements are likely to drop to around USD3.0 billion-4.0 billion a year until 2022, from USD4.8 billion in 2019. Pertamina has also been eligible for compensation of USD5.4 billion since 2017 for selling some price-controlled fuels below market prices; we do not expect the company to require this compensation until 2023 .

Upstream Volume to Increase: Fitch expects Pertamina's upstream volume to rise by 10% a year in 2021 and 2022 after it takes over the Rokan oil field in late 2021. Production was down by 3% yoy to 868 thousand barrels of oil equivalents per day in 9M20 on the natural ageing of its fields. However, we assume upstream production will remain stable after 2022 due to the company's investments in new fields and efforts to improve or maintain production at existing fields. Pertamina's upstream operations also benefit from its strong cash cost position of below USD11 per barrel of oil equivalent in 2019.

Moderate Financial Profile: Fitch estimates FFO net leverage fell to around 1.5x in 2020 (2019: 1.9x) as Pertamina curtailed its operating expenses and capex to mitigate the impact of lower earnings. We estimate FFO net leverage of 1.9x-2.7x until 2024. We expect capex and investment intensity to rise after Pertamina takes over some large and mature production-sharing contracts, which will require heavy investment to maintain production, and upgrades its refineries. Pertamina also aims to acquire large foreign oil and gas assets, which we have not factored in our forecasts.

SCP Category of 'bbb-': Pertamina's SCP reflects its vertically integrated operations and dominant position in Indonesia's energy market, which are offset by regulatory fuel-pricing risk, lower upstream volume relative to downstream sales, and our expectations of a moderate financial profile. Improvement in the SCP depend on the consistent application of the subsidy mechanism and regulations governing reimbursement for the gap in market and selling prices during periods of high oil prices.

ESG - Human Rights, Community Relations, Access and Affordability: Pertamina has an ESG Relevance Score of '4' for human rights, community relations, access and affordability due to the politically sensitive nature of fuel prices in Indonesia. Fuel price hikes have affected affordability and resulted in social unrest in the past. Pertamina sells refined oil products at government-regulated prices and bears the burden of under-recoveries to maintain the affordability of fuel prices. This has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors

Derivation Summary

Pertamina's ratings are equalised with those of its parent, the Indonesian sovereign. Pertamina is one of the country's largest crude oil producers, accounting for the majority of oil and gas output, and has a near-monopoly in refining and retailing petroleum products. Our assessment of the likelihood of support for Pertamina under each of the four factors of the Government-Related Entities Rating Criteria is the same as our assessment for PT Perusahaan Listrik Negara (Persero) (PLN, BBB/Stable), whose ratings are also equalised with those of the sovereign. PLN accounts for over 70% of Indonesia's power generation capacity and is a monopoly in the country's electricity transmission and distribution sector.

The ratings of Indian Oil Corporation Ltd (IOC, BBB-/Negative) are also equalised with those of its parent, the Indian sovereign (BBB-/Negative). Fitch, however, considers IOC's state linkages to be weaker than those of Pertamina. The socio-political impact of an IOC default is 'Very Strong', as it would significantly affect India's ability to import crude, similar to that of Pertamina. However, Fitch regards its status, ownership and control as 'Strong' versus 'Very Strong' for Pertamina due to the lower 52% state ownership of IOC. IOC's support record is assessed 'Strong' rather than 'Very Strong' because of the established support mechanisms benefitting Pertamina relative to the more extraordinary support received by IOC. IOC's financial implications of a default are also 'Strong' compared with 'Very Strong' for Pertamina due to Pertamina's position as a proxy borrower for the Indonesian government.

Key Assumptions

- Oil prices based on Fitch's Brent price deck of USD41/barrel (bbl) in 2020, USD45/bbl in 2021, USD50/bbl in 2022 and USD53/bbl thereafter; see Fitch Ratings Cuts Long-Term Oil Price Assumptions, published 8 September 2020, at www.fitchratings.com/site/pr/10135260

- Upstream volume down by 5% in 2020, increasing by around 10% a year in 2021 and 2022 after Pertamina takes over Rokan. Production to remain constant after 2022.

- Petroleum sales volume down by 6% in 2020, recovering by around 10% in 2021 and 5% in 2022

- Steady 2020 retail prices for the majority of retail fuels in rupiah terms. Steady retail prices of subsidised products in 2021, but the retail prices of other main petroleum products dropping by about 10%, then remaining constant through to 2024.

- Subsidy reimbursements falling to around USD3.0 - 4.0 billion a year from 2020 to 2022 (2019: USD4.8 billion).

- Considerably less compensation for the sale of certain fuels as low oil prices alleviate the need.

- Capex of USD6 billion in 2020 and around USD8 billion a year from 2021


Factors that could, individually or collectively, lead to positive rating action/upgrade:

- Positive rating action on the sovereign, provided there is no significant weakening of Pertamina's likelihood of government support

Factors that could, individually or collectively, lead to negative rating action/downgrade:

- Negative rating action on the sovereign

- Weakening of the likelihood of state support

For the sovereign rating of Indonesia, the following sensitivities were outlined by Fitch in a rating action commentary on 10 August 2020:

Factors that could, individually or collectively, lead to positive rating action/upgrade are:

- External Finances: Reduction in external vulnerabilities, for instance, through a sustained increase in foreign-exchange reserves, reduced dependence on portfolio flows or lower exposure to commodity price volatility.

- Fiscal Finances: An improvement in the government revenue ratio in the next few years, for example, from better tax compliance or a broader tax base, which would strengthen public finance flexibility.

- Structural: Continued improvement of structural indicators, such as governance standards, to closer in line with those of 'BBB' category peers.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

- External Finances: A sustained decline in foreign-exchange reserve buffers, resulting, for example, from a deterioration in investor confidence.

- Fiscal Finances: A continued increase in the overall public debt burden over the next few years to levels beyond our forecasts, for example, resulting from failure to reduce the fiscal deficit back to pre-crisis levels or accumulation in the debt of publicly owned entities.

- Macroeconomic: A weakening of the policy framework that could undermine macroeconomic stability, for instance, resulting from continued monetary financing of the deficit in the next few years.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Strong Liquidity: Pertamina had a cash balance of USD10.2 billion as of September 2020 and strong access to funding, against less than USD3 billion in short-term debt maturities. Fitch believes Pertamina will maintain its strong access to banks and the bond market, taking into account its state linkages, and that it will be able to meet its debt obligations and obtain funding for expansion.

Date of Relevant Committee 22 September 2020
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria.
Public Ratings with Credit Linkage to other ratings

Pertamina's ratings are equalised with those of parent, the Indonesian sovereign.

ESG Considerations

PT Pertamina (Persero): Human Rights, Community Relations, Access & Affordability: 4

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

PT Pertamina (Persero)
----senior unsecured; Long Term Rating; New Rating; BBB

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Shahim Zubair,
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Fitch Ratings Singapore Pte Ltd.
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Singapore 048583

Secondary Rating Analyst
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+65 6796 7088

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Ying Wang,
Managing Director
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Applicable Model
Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).
Corporate Monitoring & Forecasting Model (COMFORT Model), v7.9.0 (1)

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