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Rating Action:

Moody's affirms PETRONAS' A1 rating; changes outlook to negative from stable

08 Nov 2018

Singapore, November 08, 2018 -- Moody's Investors Service ("Moody's") has affirmed the A1 domestic issuer and foreign currency senior unsecured ratings of Petroliam Nasional Berhad (PETRONAS).

At the same time, Moody's has also affirmed the following three ratings: (1) the A1 rating on the senior unsecured notes issued by PETRONAS Capital Limited and guaranteed by PETRONAS, (2) the (P) A1 rating on the $15 billion medium-term note (MTN) program set up by PETRONAS Capital Limited and guaranteed by PETRONAS, and (3) the A1 rating on the sukuk issued through PETRONAS Global Sukuk Ltd.

The ratings outlook is changed to negative from stable.

RATINGS RATIONALE

The rating action follows the announcement by the Government of Malaysia (A3 stable) that PETRONAS will pay dividends of MYR26 billion in 2018 and MYR54 billion (inclusive of a one-off special dividend of MYR30 billion) in 2019.

"The negative outlook on PETRONAS' ratings reflects our view that the financial profile of PETRONAS may deteriorate if the government continues to ask the company to keep dividend payments high, especially should oil prices decline," says Vikas Halan, a Moody's Senior Vice President. "Such a situation would no longer support a ratings level for the company that is currently, two notches above that of the sovereign. In such a scenario, PETRONAS' ratings could be constrained to no more than one notch above that of the sovereign."

As announced in the Malaysian budget on 2 November 2018, PETRONAS will pay MYR30 billion as a one-off special dividend to the Government of Malaysia in 2019, in addition to the regular annual dividend, which in 2019 will total MYR24 billion. The company will also pay MYR26 billion in dividends in 2018 versus annual dividend payments of MYR16 billion in 2016 and 2017.

Although PETRONAS can support the dividend payments announced in the budget and still maintain a net cash position, a further increase in regular dividend payments cannot be ruled out especially if there is an increase in government's funding needs. High shareholder returns will reduce the company's ability to absorb the volatility in crude oil prices and constrain its financial flexibility. Nonetheless, Moody's expect that PETRONAS will continue to invest in the growth of its production and reserves.

"Further, changes to the Malaysian government's policies for the oil & gas sector could affect PETRONAS' position as the sole owner of the country's petroleum resources, and increase the royalties paid on its upstream oil & gas production," adds Halan, who is also Moody's Lead Analyst for PETRONAS. "These changes could put pressure on the company's ratings, especially if PETRONAS is required to continue paying high dividend payments."

PETRONAS' gross financial leverage — as measured by total debt/EBITDA — improved to 0.7x for the 12 months ended 30 June 2018 from about 1.0x for 2016. Moody's expects the company to maintain its gross financial leverage below 0.8x-1.0x over the next 2-3 years.

The company's total debt/total capitalization remains conservative, at below 15% at 30 June 2018, and Moody's expects that this ratio will stay at 15%-20% over the next 2-3 years as compared to its downgrade threshold of above 30%-35%.

Based on Moody's adjusted numbers, the company's net cash position — which increased to MYR97 billion at 30 June 2018 compared to MY42.8 billion on 31 December 2016 — will likely stay at MYR75-MYR80 billion over the next 2-3 years, based on Moody's current oil price assumption of $50-$70 per barrel through 2019.

Overall, credit metrics of PETRONAS will continue to be significantly stronger than the level required to maintain its A1 ratings if there is no further large one-off dividend requests from the government or if the government will allow PETRONAS to reduce dividends when oil prices decline.

The A1 ratings reflect PETRONAS' standalone credit quality, as captured in its a1 Baseline Credit Assessment (BCA).

The a1 BCA is supported by the company's: (1) large-scale hydrocarbon reserves; (2) strong financial metrics; (3) conservative financial policies; and (4) solid liquidity profile.

At the same time, PETRONAS' BCA remains constrained by the geographic concentration of its oil & gas reserves in Malaysia, and the relatively small scale of its downstream operations, with the latter resulting in its elevated exposure to the cyclicality in the oil & gas industry.

Moody's assesses the expectation of extraordinary support from the Government of Malaysia (A3 stable) and the interdependence between the government and the company as very high. However, this situation does not result in any ratings uplift, given the lower rating of the government relative to PETRONAS. The support assessment will result in rating uplift if the BCA of PETRONAS falls below a3.

Moody's support assessment reflects PETRONAS' importance as the country's national oil company and its strategic role in the development of oil & gas reserves in Malaysia; both factors of which translate to strong incentives for the government to provide support.

PETRONAS' foreign currency rating is two notches above Malaysia's foreign currency bond rating, based on: 1) the company's extremely strong standalone credit profile; and 2) PETRONAS' high proportion of revenue (over 70% in 2017) from exports and international operations.

Given the negative outlook, an upgrade of the A1 ratings is unlikely. The negative outlook on the ratings could be revised to stable if there is reduced uncertainty around company's dividend policy and further clarity of Government of Malaysia's policy for the oil and gas sector both of which lead us to conclude that the company will retain its existing financial flexibility and credit profile.

PETRONAS' BCA and ratings will face downward pressure if there are unfavorable changes to Malaysia's policy for the oil & gas sector, in turn resulting in a significant decline in the company's reserves and oil & gas entitlement. A large debt-funded acquisition or further increase in shareholder payments, without an offsetting improvement in earnings, could also put pressure on the ratings.

Credit metrics indicative of downward pressure on the ratings include retained cash flow/net debt below 45%-50%, adjusted debt/capitalization above 30%-35% and EBIT/interest expense below 12x-13x.

A downgrade of the sovereign rating would also result in a downgrade of the company's ratings.

The methodologies used in these ratings were Global Integrated Oil & Gas Industry published in October 2016 and Government-Related Issuers published in June 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

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

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Vikas Halan
Senior Vice President
Corporate Finance Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Laura Acres
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
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