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KUALA LUMPUR (December 8): Fitch Ratings downgraded Petroliam Nasional Bhd’s (Petronas) long-term local and foreign currency issuer default ratings (IDRs) to “BBB +” from “A-”, with a stable outlook.
The rating action followed an earlier downgrade of Malaysia’s IDR to “BBB +” from “A-” on December 4, with a stable outlook, due to the significant impact of the pandemic on the country’s financial health. This is the first time the rating agency has downgraded the country’s sovereign rating since the 1997/98 Asian financial crisis.
Fitch said in a statement that it had also affirmed Petronas ‘short-term foreign currency IDR at “F1,” and downgraded Petronas’ foreign currency senior unsecured debt and debt issued by Petronas Capital Ltd and guaranteed by Petronas to “BBB +” from a- “.
He said Petronas IDRs continue to be constrained by Malaysian IDRs, based on Fitch’s government-related entity rating criteria.
“The company is 100% owned by the state, which has significant influence over its operating and financial policies,” he said.
Meanwhile, Petronas’ independent credit profile (SCP), assessed by Fitch at “aa-”, is stronger than that of its owner, reflecting the company’s very strong financial profile, its integrated oil and gas operations on a large scale.
In a statement in response to the rating downgrade, the national oil company said its SCP had remained unchanged since 2016, and that the “aa-” rating is four notches above Malaysia’s current sovereign rating.
“Petronas is also able to maintain its strong financial profile despite the economic recession and disruptions that followed the Covid-19 pandemic. The ‘aa-‘ SCP also reflects Petronas’ strong business profile, its position as an oil company. full-scale and fully integrated gas producer, as well as various upstream, liquefied natural gas (LNG) and downstream refining and petrochemical operations, “he said.
Fitch said that as Petronas accounted for more than 15% of Malaysian government revenue in the past five years, the rating agency would match its ratings with the sovereign’s even if its SCP falls below the sovereign rating as long as the company generates more sustainably. more than 10% of government revenue, according to its criteria for rating government-related entities (ERG).
“Petronas’s SCP remains comfortable as we expect the company to maintain its strong financial profile despite the economic recession and disruptions that followed the Covid-19 pandemic,” he said.
“We estimate that Petronas upstream volumes will fall around 4% during 2020 due to weaker demand.
“We expect its sales volumes of liquefied natural gas, downstream oil and petrochemicals to fall between 2% and 3% in 2020. We expect a gradual economic recovery to support the revival of demand for gas and petroleum products and that the volumes will return to pre-pandemic levels in the next 12 to 18 months, although downside risks persist, ”he said.
Meanwhile, Fitch expects Petronas earnings before interest, taxes, depreciation and amortization (EBITDA) to fall approximately 40% in 2020 from RM87.4 billion in 2019, hit by weaker demand, lower oil prices and gas and weak product spreads.
“Consequently, Petronas’ free cash flow (FCF) deficit after equity investments and dividends will expand in 2020, although a plan to cut equity investments in 2020 should cushion the impact,” he said.
While it expects Petronas to maintain its net cash position for the next four years, the negative FCF will reduce its net cash balance.
“While negative FCF will expand in 2020, we expect lower dividend payments in 2021 to support FCF’s return to 2019 levels despite similar product volumes and weak prices. We estimate that Petronas’ FCF will be marginally negative to neutral thereafter, ”he said.
In response, Petronas said it has been in a net cash position since 2006 and has the lowest full-cycle leverage and highest interest coverage ratio among its “AA-” rated peers.
It expects the group’s annual capex to range from RM 45 billion to RM 50 billion after 2020, mainly driven by upstream investments, which are critical to stem the decline in production in domestic oil and gas fields. of Petronas and drive growth abroad.
He also expects Petronas’ dividend payment to fall in 2021, following weaker earnings from coronavirus disruptions in the current year.
“The government has allowed Petronas to cut dividends to maintain its financial profile in previous recessions. We estimate that dividends will rise to around RM 24 billion to RM 26 billion during 2022-2023, subject to oil prices, investments and the impact on its financial profile, ”he said.
Petronas emphasized that its solid fundamentals remain unchanged. “Petronas has consistently maintained a conservative financial policy, strict capital discipline and a focus on cost optimization to ensure the preservation of liquidity, which has enabled the company to withstand volatility and shocks in the market,” said.
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Petronas: Solid fundamentals unchanged, maintains conservative financial policy
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