FLEXIBILITY IN PETRONAS PAYOUT

Fitch Ratings says government had allowed company to cut dividends before

THE government will support Petroliam Nasional Bhd (Petronas) in maintaining a healthy credit profile and continuing its investments due to its importance to national revenue, said Fitch Ratings.

This means there will be some flexibility in Petronas’ dividend payment to the government as the national oil firm weighs requests for increased dividends to support Covid-19-related economic stimulus against the impact on its financial profile and other internal parameters.

“Petronas’ net cash position at the end of last year can support a rise in dividends from the RM24 billion declared for this year, but we do not expect any large special dividends like in last year,” said Fitch in a statement.

The rating agency reaffirmed its long-term foreign and local currency issuer default ratings at “A-” with a “negative” outlook on Petronas.

Fitch expects Petronas’ dividend payment to fall next year following weaker earnings due to the disruptions from the Covid-19 pandemic in the current 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 to 2023, subject to crude oil prices, investments and the impact on its financial profile,” it added.

Fitch said Petronas’ standalone credit profile at “AA-” is stronger than that of its owner, reflecting the company’s very strong financial profile, large-scale and integrated oil and gas (O&G) operations.

“Petronas’ standalone credit profile remains comfortable as we expect the company to maintain its strong financial profile despite the economic downturn and disruptions following the Covid-19 pandemic.”

The firm said Petronas’ strong business profile reflects its position as one of the world’s leading fully integrated O&G producers.

“Petronas has built up crude O&G producing assets in the Asia Pacific, Central Asia, Middle East, Africa and Canada, making it a leading global liquefied natural gas supplier.”

The company produced about 1.75 million barrels of oil equivalent per day last year (2018: 1.69 million barrels) with proved reserves of 5.85 billion barrels translating into adequate proved reserve life of over nine years.

Fitch said Petronas has been in a net cash position since 2006, and has the lowest through-thecycle leverage and highest interest-coverage ratio among “AA-” rated peers.

“We expect Petronas to maintain its strong financial profile with a sustained, but narrowing, net cash position.”

Fitch said Petronas’ earnings before interest, tax, depreciation and amortisation are likely to fall by 40 to 45 per cent this year from RM87.4 billion last year as weaker demand leads to reduced volumes, low O&G prices and weak products.

This will undermine its operating cash flows and free cash flow deficit.

Still, Fitch expects Petronas to maintain its net cash position over the next four years, but negative free cash flow during the period would reduce the net cash balance.

Petronas reported cash and equivalents of RM157 billion against a total debt of about RM93 billion up to the end of June.

While negative free cash flow would expand this year (from a deficit of RM13 billion last year), Fitch expects lower dividend payouts next year to support the return of free cash flow to 2019 levels despite similar product volumes and weak prices.

Fitch said Petronas is expected to set aside RM45 billion to RM50 billion as capital expenditure (capex) a year after 2020.

The capex, mainly for upstream investments, are critical to arrest falling production at Petronas’ domestic O&G fields and drive growth overseas.

Petronas had pledged to spend about RM50 billion on capex this year but had cut it by 21 per cent amid Covid-19 and global output cuts that led to a fall in oil price.

“Capex in the downstream segment (2019: RM10 billion) should drop with the completion of its refinery and petrochemical integrated development project,” Fitch said.

It said Petronas has plans to increase investments in new energy projects, primarily renewables. But these would remain relatively small over the next two years.