Moody's Assigns Baa2 Rating To Pertamina's Proposed Bonds

INDUSTRY.co.id - Singapore, 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 notes will be issued under Pertamina's global medium-term note program, which is rated (P)Baa2, and the proceeds will be used for capital spending and general corporate purposes. The ratings outlook is stable.

RATINGS RATIONALE

Pertamina's Baa2 issuer rating primarily reflects its standalone credit quality, as captured in its baa3 BCA. The issuer rating reflects Pertamina's strategically important position as Indonesia's (Baa2 stable) national integrated oil and gas company, contributing significant upstream production, and accounting for substantially all of the country's refineries, fuel marketing stations and gas pipelines.

At the same time, the rating also takes into account Pertamina's exposure to an evolving regulatory environment in Indonesia, and a high degree of execution risk associated with its sizable investment plan.

The Baa2 issuer rating also incorporates Moody's expectation of the very high likelihood of extraordinary support from the Government of Indonesia to Pertamina in times of need, and very high interdependence between the two parties.

Moody's support assessment is based on Pertamina's strategic importance, given its important role in oil and gas exploration, petroleum product distribution and gas distribution in the country, as well as the government's close supervision of its strategies and budget.

"The rating incorporates our expectation that Pertamina will maintain credit metrics that are supportive of its ratings, despite the increase in working capital outflow, due to delayed subsidy reimbursement and higher capital spending," says Vikas Halan, a Moody's Senior Vice President.

In 2018, the Government of Indonesia agreed to reimburse Pertamina for the revenue shortfall arising from the difference between the government-regulated sale price and market-linked price for specific types of fuel. However, these reimbursements are not immediately accretive to cash inflow because they will be paid by installments on a deferred basis starting in 2020.

As of 30 September 2019, Pertamina had $5.3 billion of receivables from the Government of Indonesia as against $2.2 billion as of 31 December 2017. The increase is largely on account of a delay in the receipt of compensation from the government for selling certain petroleum products at subsidized prices.

"Pertamina expects to start receiving compensation from the government in installments from this year, which will improve its cash flows," says Halan, who is also Moody's Lead Analyst for Pertamina.

Moody's expects Pertamina's capital spending over the next 3 years to average around $6-$7 billion annually as against $3 billion over the last three years. The increase in capital spending will be driven by the company's plan to increase in refining capacity and efficiency.

Also, Pertamina will start spending in development of new oil & gas that has been awarded by the government in 2018 and 2019. This will result in increase in company's total borrowings. Consequently, Moody's estimates that Pertamina's retained cash flow to net debt will deteriorate to 27%-28% from about 38% for the 12 months ended September 2019 but will still remain supportive of its ratings.

However, any delay in the disbursement by the government or continued price-freeze will result in further deterioration in Pertamina's credit metrics. In terms of environmental, social and governance factors, the ratings consider the following: For environmental factors, Pertamina's issuer rating incorporates the environment risk that the company is exposed to through its oil & gas businesses.

Nevertheless, the risk is somewhat mitigated by the high proportion of natural gas in its production mix, which accounted for about 57% of its total oil & gas production in 2018. With regards to social factors, Pertamina's business mix includes sectors that are exposed to moderate to high social risks, especially issues related to responsible production and health & safety.

This social risk is mitigated by the company's long track record of operating its businesses without any major incidents. 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 robust liquidity.

Pertamina's has strong liquidity as of 30 September 2019 with cash and cash equivalent of $8.1 billion as against debt maturing over next 12 months of $2.5 billion. The outlook on Pertamina's ratings is stable, reflecting the stable outlook for Indonesia's sovereign rating, as well as Moody's expectation that Pertamina will manage its capital expenditure program, 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 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 it (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 Government-Related Issuers published in June 2018.