Singapore, April 06, 2020 -- Moody's Investors Service has affirmed the A2 domestic currency issuer
and foreign currency senior unsecured ratings of Petroliam Nasional Berhad
(PETRONAS).
At the same time, Moody's has also affirmed: (1) the a2 baseline
credit assessment (BCA) of PETRONAS; (2) A2 rating on the senior
unsecured notes issued by PETRONAS Capital Limited and guaranteed by PETRONAS;
and (3) (P)A2 senior unsecured rating on the $15 billion medium-term
note (MTN) program set up by PETRONAS Capital Limited and guaranteed by
PETRONAS.
Moody's has also assigned the A2 rating to the proposed USD denominated
senior unsecured notes to be issued by PETRONAS Capital Limited and guaranteed
by PETRONAS drawn down from its MTN program. The proceeds will
be used for general corporate purposes including but not limited to capital
expenditure and refinancing.
The rating outlook remains stable.
RATINGS RATIONALE
"The rating affirmation reflects our expectation that the credit
metrics of PETRONAS will continue to support its BCA and ratings despite
the current low oil price environment. The stable outlook also
incorporates our expectation that the company will maintain its net cash
position by limiting the negative free cash flows despite likelihood of
increase in dividend payment," says Vikas Halan, a Moody's
Senior Vice President.
The current low oil price environment is credit negative for PETRONAS
and it will result in significant earnings decline. At the same
the Government of Malaysia (A3 stable) has requested PETRONAS, as
one of the state owned companies, to consider making a higher dividend
payment in 2020, as compared to its previously announced MYR24 billion,
in supporting a portion of its economic stimulus package following the
weakening economic conditions due to the COVID-19 pandemic.
The amount and timing of PETRONAS' dividends is subject to the approval
of PETRONAS' Board of Directors.
Despite lower earnings and possible increase in dividends PETRONAS'
large net cash position of MYR62 billion ($15 billion) as at 31
December 2019 will continue to support its A2 rating and stable outlook.
"Under our base case, where we expect Brent crude prices to
average $43 per barrel in 2020, we estimate EBITDA of PETRONAS
to decline by about 30% in 2020 as compared to 2019. In
a downside case, where we expect the Brent crude prices to average
$30 per barrel in 2020, the decline in EBITDA will be 53%.
Under both scenarios, and incorporating revised dividend payments,
we expect PETRONAS' to generate negative free cash flow of about
MYR20 billion -- MYR30 billion, assuming it maintains its capital
spending at the same level as 2019" says Halan, who is Moody's
Lead Analyst for PETRONAS.
PETRONAS maintains strong flexibility to reduce its capital spending and
can minimize its negative free cash flow.
Moody's does not expect a significant increase in PETRONAS'
net borrowings following the completion of the proposed bond issuance,
because the proceeds will either increase the company's cash and
cash equivalents or be used to repay its upcoming debt maturities.
PETRONAS has already repaid $1.25 billion USD-denominated
sukuk in March 2020 and its next bond maturity includes $1.75
billion of USD-denominated bonds in 2022.
The A2 ratings reflect PETRONAS' standalone credit quality, as captured
in its a2 Baseline Credit Assessment (BCA).
The a2 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 an elevated exposure to the cyclical oil & gas industry.
The BCA is also constrained at no more than one notch above the rating
of the Malaysia sovereign's A3 rating. This is driven by
Moody's assessment that the close credit links between PETRONAS
and the Malaysian government create potential for government interference,
which may have a negative impact on the company's business profile or
cash flow.
Moody's assumes a very high likelihood of extraordinary support from and
interdependence with the Government of Malaysia (A3 stable). However,
this assumption does not result in any ratings uplift, because the
sovereign rating is already positioned below PETRONAS' ratings.
PETRONAS' foreign-currency rating is one notch above Malaysia's
foreign-currency bond rating, based on (1) the company's
extremely strong standalone credit profile; (2) its high proportion
of revenue (67% in 2019) generated from exports and international
operations, and (3) its superior access to international capital
markets.
The company's higher-than sovereign rating also incorporates a
long track record of the government allowing PETRONAS to operate independently,
despite its 100% ownership.
In terms of environmental, social and governance (ESG) factors,
the ratings consider the following:
(1) For environmental factors, PETRONAS' issuer rating incorporates
the environmental 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 65% of its total oil & gas production
in 2019. However, more than half of PETRONAS' gas sales
are in the form of LNG, the price of which is currently linked to
crude oil price benchmarks. Although the company has begun signing
LNG contracts that are linked to other gas indexes, its proportion
is not significant to offset a decline in oil prices.
(2) With regards to social factors, PETRONAS' business mix
includes sectors that are exposed to moderate to high social risks,
especially issues related to responsible production and health & safety.
The coronavirus outbreak has not had a significant impact on company's
operations yet but if the virus outbreak is prolonged, some of its
customer can call a force majeure which could have some negative implications
for its volumes.
(3) As for governance factors, the issuer rating incorporates PETRONAS'
status as a 100% government-owned company, which gives
government the ability to influence the company's operations and
financial policies as well as approve all board appointments. However,
PETRONAS has a track record of maintaining a high standard of corporate
governance and independent operations despite its 100% government
ownership. The possibility of government influence, through
increases in royalty and taxes or by requesting higher dividend payments
is captured in PETRONAS' A2 rating, which is constrained to
no more than one notch above the sovereign's A3 rating.
Despite being unlisted, PETRONAS publishes quarterly financial statements
and maintains a degree of transparency into its operating performance.
The rating also takes into account PETRONAS' track record of maintaining
conservative credit metrics and robust liquidity.
PETRONAS' liquidity profile is excellent with the company having
a net cash position of MYR62 billion as of 31 December 2019.
The outlook on the ratings is stable, in line with the stable outlook
on the government's A3 rating.
The stable outlook is also underpinned by the company's large cash
balance, which provides protection to its credit profile during
periods with heightened oil price volatility or when there is an increase
in government payments in the form of dividends, royalty and taxes.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
PETRONAS' BCA and ratings could face downward pressure if (1) oil prices
remain low for a prolonged period such that the average oil prices stay
below $30 per barrel for multiple years; or (2) there are
unexpected changes to Malaysia's policy for the oil & gas sector that
result in a significant decline in the company's reserves and oil &
gas entitlement; (3) the company makes large debt-funded acquisition
that weakens it credit metrics.
Credit metrics indicative of downward pressure on the ratings include
retained cash flow/net debt below 40%-45%,
adjusted debt/capitalization above 35%-40% and EBIT/interest
expense below 10x-11x.
A downgrade of the sovereign rating would also result in a downgrade of
the company's ratings.
An upgrade of the ratings to A1 will require an upgrade of the Malaysian
government's rating to A2. In addition, an upgrade will require
PETRONAS to maintain a credit profile that continues to support higher
ratings. Credit metrics supportive of an A1 rating level include
retained cash flow/net debt above 45%-50%,
adjusted debt/capitalization below 30%-35% and EBIT/interest
expense above 12x-13x.
The methodologies used in these ratings were Integrated Oil and Gas Methodology
published in September 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1172345,
and Government-Related Issuers Methodology published in February
2020 and available at https://www.moodys.com/research/Government-Related-Issuers-Methodology--PBC_1186207.
Alternatively, 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 DISCLOSUERS
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that issued the credit rating is available on www.moodys.com.
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
Ian Lewis
Associate Managing Director
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
