Petronas maintains strong financial profile despite Fitch’s downgrade

The rating agency downgraded Petronas’ long-term foreign- and local-currency IDRs to BBB+ from A-


PETROLIAM Nasional Bhd (Petronas) was able to maintain a strong financial profile despite economic fallout and disruption brought upon by the Covid-19 pandemic.

Responding to Fitch Ratings Inc’s downgrade on its sovereign rating, the oil and gas (O&G) company emphasised that its strong fundamentals remain unchanged.

It said Fitch’s assessment on the group’s standalone credit profile (SCP), which is at AA-, reflects the group’s strong business profile, its position as a large-scale and fully integrated O&G producer, and diverse operations in upstream, liquefied natural gas and downstream refining and petrochemicals.

“Petronas has consistently maintained a conservative financial policy, stringent capital discipline and focus on cost optimisation towards ensuring preservation of liquidity, which have enabled the company to withstand volatility and shocks in the market,” it said in a statement yesterday.

The rating agency downgraded Petronas’ long-term foreign- and local-currency issuer default ratings (IDRs) to BBB+ from A- with a stable outlook following the downgrade of Malaysia’s sovereign rating last week.

The downgrade made on Malaysia’s IDRs last week was due to the impact of Covid-19 on the economy and expectation that the country’s fiscal deficit would remain higher than pre-pandemic levels.

Fitch also affirmed Petronas’ short-term foreign-currency IDR at F1, while it downgraded the ratings on Petronas’ foreign-currency senior unsecured debt and debt issued by Petronas Capital Ltd and guaranteed by Petronas to BBB+ from A-.

“Petronas’ IDRs continue to be capped by Malaysia’s IDRs as per Fitch’s government-related entities rating criteria. The company is

100%-owned by the state, which exerts significant influence over its operating and financial policies.

“Petronas’ SCP, assessed by Fitch at AA-, is stronger than that of its owner, reflecting the company’s very strong financial profile, large scale and integrated O&G operations,” it said in a statement yesterday.

Fitch viewed the sociopolitical implications of a default by the company as “Very Strong” as it would severely disrupt Malaysia’s energy security.

A default would affect Petronas’ ability to undertake upstream O&G production, and refining and retail distribution of fuel and gas supply to the power and other industries.

Fitch also expects Petronas’ Ebitda to drop by about 40% in 2020 from RM87.4 billion in 2019, dragged by weaker demand, low oil and gas prices and weak products.

“We expect a capital expenditure (capex) of between RM45 billion and RM50 billion a year after 2020, driven mainly by upstream investments, which are critical to arrest falling production at Petronas’ domestic O&G fields and drive growth overseas,” it said.

The agency also foresees Petronas’ dividend payment to decline next year following weaker earnings on the disruptions from the virus this year.

“The government has allowed Petronas to cut dividends to maintain its financial profile in previous downturns. We estimate dividends will rise to around RM24 billion to RM26 billion over 2022-2023, subject to crude oil prices, investments and the impact on its financial profile,” it added.

Meanwhile, Fitch has also downgraded Telekom Malaysia Bhd’s (TM) long-term foreign-currency IDR and senior unsecured rating to BBB+ from A-.

On the downgrade for TM, Fitch said the telecommunications company (telco) had strong sovereign linkages as it assessed TM’s status, ownership and control links with the state and the government’s record.

“The state had a 59% stake at end-May 2020. It holds a special share in TM through the Minister of Finance Inc, allowing the government to align TM’s operating and financing decisions with its policies.

“The government has exercised its strategic influence on TM’s broadband tariffs and wholesale access policies through the regulator, as well as previous mandates in undertaking national broadband investments,” it said.

It also viewed the sociopolitical implications of a default by TM as “Moderate” due to its company’s role in supporting the government’s initiatives.

The financial impact of a TM default is, however, assessed as “Strong”, showing possible damage to the government’s borrowing capacity as it is an active borrower in the domestic bond market, it said.

“Fitch expects TM’s capex/revenue ratio to increase to 25%-30% in 2021-2022 respectively, partly from a spillover of deferred capex this year.

“The government’s aspiration to accelerate digital connectivity under the Jalinan Digital Negara initiative would keep capex elevated in the medium term.”

It added that TM’s recovery process is uncertain as the pro-longed economic downturn could curb enterprise spending and delay government projects.

Any further relief measures pro-vided by telcos will lead to slower monetisation.

“Our projections anticipate TM’s revenue to remain subdued in 2021, before resuming modest growth in 2022.”