KUALA LUMPUR – Fitch Ratings has downgraded Petroliam Nasional Bhd’s (Petronas) long-term foreign- and local-currency issuer default ratings (IDRs) to “BBB+” from “A-”, with the outlook at stable.
In a statement today, Fitch said the rating action follows the downgrade of Malaysia’s IDR to “BBB+” from “A-” on Friday, with the outlook at stable.
The ratings agency said Petronas accounted for more than 15% of the government’s revenue over the last five years.
“Fitch will equalise its ratings with those of the sovereign even if its standalone credit profile (SCP) falls below the sovereign rating, so long as the company sustainably generates more than 10% of government revenue, in line with our criteria for rating government-related entities.”
It said the downgrade is due to “strong” sovereign linkages, among others, as Putrajaya’s 100% ownership gives it significant influence over Petronas, although it is less directly involved in the company’s operations, financing and investments.
“Petronas benefits from exclusive rights to Malaysia’s oil and gas reserves by law. Petronas has not required tangible financial support, and we expect financial support to be forthcoming, if necessary.”
It said Petronas’ SCP remains comfortable, expecting the oil company to maintain its strong financial profile despite the economic downturn and disruptions due to the Covid-19 pandemic.
“We estimate Petronas’ upstream volumes to fall by about 4% in 2020 due to weaker demand. We expect its liquefied natural gas, downstream petroleum and petrochemical sales volumes to fall by 2% to 3% in 2020.”
Fitch also expects a gradual economic recovery to support a revival in demand for gas and petroleum products, with volumes returning to pre-pandemic levels over the next 12 to 18 months, although downside risks remain.
On the impact of the coronavirus, it expects Petronas’ earnings before interest, taxes, depreciation and amortisation to fall by about 40% in the financial year ending December 31, 2020 from RM87.4 billion a year ago, hit by weaker demand, low oil and gas prices, and weak product spreads.
“Consequently, Petronas’ free cash flow deficit after capital expenditure (capex) and dividends will expand in 2020, though a plan to cut the 2020 capex should cushion the impact.”
Petronas, in a statement following the ratings revision, emphasised that the company’s strong fundamentals have enabled it to withstand volatility and shocks in the market.
It said it has been able to maintain a strong financial profile, conservative financial policy and stringent capital discipline, and focus on cost optimisation towards ensuring the preservation of liquidity despite the coronavirus crisis.
“The ‘aa-’ SCP also reflects Petronas’ strong business profile, its position as a large-scale and fully integrated oil and gas producer, as well as diverse operations in upstream, liquefied natural gas, and downstream refining and petrochemicals.”
It said its ratings continue to be capped to the sovereign rating, so long as it sustainably generates more than 10% of government revenue under Fitch’s criteria.
The firm’s SCP as assessed by Fitch has remained unchanged since 2016 at “aa-”, which is four notches above that of the sovereign rating, compared with the previous three notches above.
“We have been in a net cash position since 2006, and the lowest through-the-cycle leverage and highest interest-coverage ratio among peers rated ‘AA-’.” – Bernama, December 8, 2020
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