Thursday 28 Mar 2024
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KUALA LUMPUR (Feb 28): Moody's Investors Service said an upgrade of Petroliam National Bhd's (Petronas) credit rating to A1 will require an upgrade of the Malaysian government's rating to A2 and the company to maintain credit metrics that support higher ratings.

In a note yesterday (Feb 27), Moody's said credit metrics supportive of an A1 rating for Petronas included retained cash flow/net debt of above 45% to 50%, adjusted debt/capitalisation of below 30% to 35% and earnings before interest and taxes (EBIT)/interest expenses of above 12 to 13 times.

"Petronas' (current) A2 rating reflects its strong credit metrics and excellent liquidity, with a track record of maintaining a net cash position through the oil price cycle," Moody's analyst Hui Ting Sim wrote in the note.

According to Moody's, 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.

Moody's said despite Petronas 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 excellent liquidity," Moody's said.

Moody's said it expects Petronas' credit metrics will stay strong through 2021-2022 with adjusted debt/capitalisation at around 22% and EBIT/interest expenses at eight to 12 times.

According to Moody's, Petronas' commitment to holding significant cash will protect its credit quality during periods of volatile crude prices.

"Based on Moody's medium-term Brent crude oil price assumption of US$45-US$65 per barrel, Petronas' operating cash flow will be sufficient to fund its capital spending and regular dividend payments.

"The company will pay RM18 billion of dividend in 2021 to the government of Malaysia (A3 stable) according to the latest budget. However, requests by the government for higher dividend payments, especially if there is an increase in the government's funding needs, cannot be ruled out.

"In such a scenario, Moody's expects Petronas to minimise the impact on its financial position by reducing its cash outflow on operations or capital spending.

"The company's reported net cash position fell to RM52 billion in 2020 from RM82 billion in 2019 because of negative free cash flow arising from challenges caused by the pandemic. Nevertheless, Petronas' liquidity and credit metrics remain excellent despite the difficult market conditions," Moody's said.

According to Moody's, Petronas' foreign-currency rating is one notch above Malaysia's A3 foreign-currency issuer rating, based on the company's robust stand-alone credit quality, its high proportion of revenue at 70% in 2020, generated from exports and international operations, and its superior access to international capital markets.

Petronas' higher-than-sovereign rating also incorporates a long track record of the government allowing Petronas to operate independently, despite its 100% ownership, according to Moody's.

However, Petronas' baseline credit assessment (BCA) of A2 is constrained at no more than one notch above the Malaysia sovereign's A3 rating, Moody's said.

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 said.

"Petronas' BCA and ratings could face downward pressure if there are unexpected changes to Malaysia's policy for the oil and gas sector that result in a significant decline in the company's reserves as well as oil and gas entitlement; or the company makes a large debt-funded acquisition that weakens its credit metrics.

"Credit metrics indicative of downward pressure on the ratings include retained cash flow/net debt of below 40%-45%, adjusted debt/capitalisation of above 35%-40% and EBIT/interest expenses of below 10x-11x. A downgrade of the sovereign rating would also result in a downgrade of the company's ratings," Moody's said.

Moody's note yesterday (Feb 27) followed Petronas' announcement on Friday (Feb 26) on its results for the fourth quarter and full year ended Dec 31, 2020 (FY20).

Petronas said in a statement on Friday that the the group reported a full FY20 loss after tax of RM21.03 billion compared with a profit after tax (PAT) of RM40.47 billion in FY19 after registering a RM31.5 billion impairment charge on assets during FY20.

"Excluding impairment, Petronas Group recorded PAT of RM10.5 billion for the year ended 2020, a decrease of 78% compared to RM48.8 billion in the previous financial year in line with lower revenue realised, partially offset by lower group costs incurred.

"The lower group revenue recorded RM178.7 billion against RM240.3 billion in the previous financial year was largely due to the effects of plummeting oil prices which saw lower average realised prices for all products, along with demand disruption resulting in lower sales volume from processed gas, petroleum products and LNG (liquified natural gas)," Petronas said.

Edited ByChong Jin Hun
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