Moody’s: Petronas credit metrics to remain strong

Operating cash flows sufficient to fund capital spending

KUALA LUMPUR: Moody’s Investors Service expects Petroliam Nasional Bhd’s (Petronas) credit metrics to stay strong through 2021 to 2022.

It said this was based on an adjusted debt/ capitalisation at around 22% and earnings before interest and tax/interest expense at eight to 12 times.

“Further, the company’s commitment to hold significant cash will protect its credit quality during periods of volatile crude prices,” it said in a statement.

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

Moody’s said Petronas will pay Rm18bil dividend in 2021 to the Malaysian government (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 outflows on operations or capital spending,” it said.

Petronas’ reported net cash position fell to Rm52bil in 2020 from Rm82bil in 2019 because of negative free cash flows arising from challenges caused by the pandemic.

Nevertheless, Petronas’ liquidity and credit metrics remain excellent despite the difficult market conditions, the rating agency said.

Petronas’ foreign-currency rating is one notch above Malaysia’s A3 foreign-currency issuer rating, based on the company’s robust standalone credit quality; its high proportion of revenue (70% in 2020) generated from exports and international operations; and its superior access to international capital markets.

The company’s higher-than-sovereign rating also incorporates a long track record of the government allowing Petronas to operate independently, despite its 100% ownership by the government.

However, Petronas’ baseline credit assessment (BCA) of a2 is constrained at no more than one notch above the Malaysia sovereign’s A3 rating.

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 also said in terms of environmental, social and governance (ESG) factors, the ratings consider the following:

> In terms of environmental factors, Petronas is exposed to carbon transition risk as oil demand will decline from the global transition towards less carbon-intensive sources of energy.

Nevertheless, the company is better positioned than its oil-heavy peers given the majority of its production consists of natural gas, which is less carbon-intensive. In 2020, natural gas accounted for about 64% of its total oil and gas entitlement.

Petronas is also responding proactively to the changing energy landscape, and intends to invest in specialty chemicals and new energy as part of its growth strategy.

The company has committed to allocate 9% of its total capital spending over 2021-2025 on renewable energy with a focus on solar and wind energy.

> With regards to social factors, Petronas’ business mix includes sectors that are exposed to moderate to high social risks, especially issues related to responsible production as well as health and safety.

Operational incidents occurred recently, but its implications are not material to the company’s operations or financial profile.

Petronas has undertaken a comprehensive review to improve its operational and safety standards.

> In terms of governance considerations, the issuer rating incorporates Petronas’ status as a 100% government-owned company, which gives the government the ability to influence the company’s operations and financial policies as well as approve all board appointments.

However, Petronas has a track record of maintaining a high standard of corporate governance and independent operations despite its 100% government ownership.

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 also highlighted that despite 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.