KUALA LUMPUR (Feb 28): Petroliam Nasional Bhd's (Petronas) solid balance sheet and sizeable earnings base should allow its creditworthiness to withstand potential additional returns to Sarawak, says S&P Global Ratings.

"With a net cash position of RM82 billion as at Dec 31, 2019 and growing earnings outside of Malaysia, we believe Petronas can accommodate the financial impact of Sarawak's current claims," the international rating agency said in a statement today.

Last year, Sarawak filed a lawsuit against the national oil company, alleging that it had failed to pay RM1.3 billion for the state sales tax imposed on petroleum products for the first half of 2019. In response, Petronas filed a judicial review to challenge the jurisdiction of Sarawak over the imposition of such sales tax.

S&P Global Ratings estimates that should the courts rule for the sales tax at the proposed rate of 5%, the sales tax could shave up to RM3 billion off Petronas' full-year earnings before interest, tax, depreciation and amortisation (Ebitda), with Brent crude oil at about US$60 per barrel.

"At the same time, the cost of hydrocarbon extraction in Sarawak could further increase as the state seeks to review the local fiscal regime and its participation in returns Petronas generates on its territory. We estimate this could lower Petronas' Ebitda by a few more billions ringgit," it said.

But other possible options such as Sarawak's buying a stake in Petronas or participating directly on the field level to operations in its territory, may not be viable, S&P Global Ratings said, as they look overly complex to implement.

The rating agency said another key consideration in the ongoing discussions between Sarawak and the federal government is to preserve the attractiveness of the domestic oil and gas industry for foreign investors.

It noted that Sarawak holds about 60% of Malaysia's gas and 30% of oil reserves. Of Petronas' proven and probable reserves, 60% were located in Malaysia at end-2018.

S&P Global Ratings affirmed a long-term 'A' local currency and 'A-' foreign currency issuer credit ratings on Petronas. It also affirmed an 'A-' foreign currency issue credit ratings on the notes and sukuk trust certificates Petronas has issued or guaranteed.

"The stable outlook on Petronas mirrors that on the sovereign credit rating on Malaysia, given our view that the company remains sensitive to government intervention."

However, the rating agency warned that it may lower the rating on Petronas if its lowers its sovereign rating on Malaysia and vice versa. "We could also downgrade Petronas if its relationship with the sovereign changes materially and the company's balance sheet and liquidity weaken significantly."

S&P Global Ratings added that it may assess a weaker stand-alone credit profile of 'aa' on Petronas if its debt-to-Ebitda ratio exceeds 1 time and it generates substantial negative discretionary cash outflows with no prospect of improvement.

"This could materialise if annual negative discretionary cash flows exceed RM40 billion per year for more than two years and would most likely occur if the company's spending or dividend distributions are together substantially higher than the RM80 billion we anticipate."