Petronas’ strong balance sheet to compensate for weak oil prices

The national O&G firm is assessed at ‘AA’ as they benefitted from vertically integrated business profiles


FITCH Ratings Inc maintained Petroliam Nasional Bhd’s (Petronas) issuer default ratings (IDRs) at “A-/Negative” despite expectations that the company is facing a far more challenging year.

Fitch Ratings added that Petronas has the strongest balance sheet among Asia-Pacific oil and gas (O&G) companies and commensurate with its standalone credit profiles (SACPs) as it has maintained a net cash position for over a decade.

That said, Fitch Ratings expects almost all Asia-Pacific O&G companies to post negative free cashflow in 2020.

The rating agency said this is due to lower O&G prices stemming from the coronavirus pandemic and will continue to be so beyond 2021 in most cases albeit with gradual improvement due to higher price assumptions.

“However, their IDRs and outlooks have stayed mostly unchanged in the current downturn except in the case of changes in sovereign rating outlooks or revisions to their parents’ SACPs.

“Our opinion of weaker linkage is driven by the fact that the majority of Fitch Ratings-rated Asia-Pacific O&G companies are government-related entities (GREs) or have parent companies that are GREs and their IDRs are linked to or affected by sovereign ratings or by the ratings of their GRE parent companies,” the firm said.

For the first half ended June 30, 2020 (1H20), Petronas posted a net loss of RM16.5 billion versus RM28.9 billion for the previous corresponding period.

Meanwhile, cumulative revenue fell 22.7% to RM93.6 billion from RM121.11 billion in 1H19.

Despite the net loss, the national O&G firm generated an operating cashflow of RM26.26 billion in 1H20. Its cash pile stood at RM156.86 billion as at June 30.

Fitch Ratings also expects companies with stronger balance sheets and flexibility to adjust capital expenditure and costs, or those that have some cashflow protection to maintain their SACPs during this downturn despite a temporary increase in leverage and negative free cashflow generation.

“Companies with weaker balance sheets and limited operating flexibility will be more affected by the lower oil prices, and their SACPs were also revised down, including those of Oil India Ltd (‘BBB-/Negative’) and PT Saka Energi Indonesia (‘BB/Negative’),” the firm added.

The rating agency also maintained an outlook similar to Asia-Pacific O&G companies as these companies mostly stayed unchanged in this economic downturn, except when revisions were made to sovereign outlooks, their parents’ SACPs.

In a report titled “Asia-Pacific Oil and Gas Companies — Peer Review”’ which was published on Monday, the American credit agency said Petronas’ SACPs is at “AA-“, higher than the rating of its owner, reflecting the company’s very strong financial profile, large scale and integrated O&G operations.

The company is 100%-owned by the state, which exerts significant influence over its operating and financial policies, the report said.

The outlook on its IDRs was revised to “Negative” from “Stable” in April 2020 following the revision of the outlook on Malaysia’s IDRs.

Fitch Ratings noted that besides China National Petroleum Corp, PetroChina Co Ltd and PTT pcl, Petronas was also assessed at “AA” as they benefitted from vertically integrated business profiles.

In addition, Fitch Ratings said Petronas and Chevron Nigeria Ltd are large producers with daily production of between one million to two million barrels of crude oil equivalent.