Fitch Affirms Malaysia's PETRONAS at 'A-', Outlook Stable

(The following statement was released by the rating agency) SYDNEY/SINGAPORE, February 23 (Fitch) Fitch Ratings has affirmed Malaysia-based Petroliam Nasional Berhad's (PETRONAS) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'A-', and affirmed its Short-Term Foreign-Currency IDR at 'F1'. The Outlook on the Long-Term IDRs is Stable. At the same time, Fitch has affirmed PETRONAS' foreign-currency senior unsecured rating and ratings on debt issued by PETRONAS Capital Limited and guaranteed by PETRONAS at 'A-'. PETRONAS continues to maintain a strong standalone credit profile, assessed by Fitch at 'AA-'. KEY RATING DRIVERS Ratings Constrained by Sovereign: The Foreign- and Local-Currency IDRs of PETRONAS are constrained by those of its sovereign owner Malaysia (A-/Stable). PETRONAS is 100% owned by Malaysia, and the government can exert significant influence over its operating and financial policies. Strong Standalone Profile: The standalone credit profile of PETRONAS continues to be strong - assessed by Fitch at 'AA-'. The rating headroom for the company has decreased due to pressure on operating cash flow generation as oil prices remain low. This has been mitigated by the company's planned capex and operating expenditure savings through to 2020, which total MYR50bn, and a lower dividend. However, with oil prices likely to recover only slowly, operating cash flow is likely to continue being under pressure. Diversified Operations; Robust Financial Profile: PETRONAS' strong business profile reflects is position as a global, fully integrated oil and gas production company. It has diverse operations across the fuel mix (crude oil and condensates, and natural gas), by geography, and business line (exploration and production, LNG, and downstream refining and petrochemicals). As the national oil company of Malaysia, PETRONAS has exclusive rights to Malaysian oil and gas reserves. PETRONAS has also built up a portfolio of international crude oil and gas producing assets in Asia-Pacific, central Asia, Middle East, Africa and Canada over the last 20 years. The company's 2015 production entitlement was 1.6 million barrels of oil equivalent per day (boe/d). The company's standalone financial profile remains strong - it continues to be net cash positive, and has the lowest through-the-cycle leverage and highest interest coverage ratios among its 'AA-' rated peers, Royal Dutch Shell plc (AA-/Negative) and Total SA (AA-/Negative). Lower Dividend Supports Rating: PETRONAS has guided for a dividend of MYR13bn in 2017, which is down from MYR16bn in 2016, MYR26bn in 2015 and MYR29bn in 2014. The reduction will allow PETRONAS to meet the majority of its capex from internally generated cash flows, even with weakened CFO due to low commodity prices. Nevertheless, we expect the company to continue to make sizeable contributions to the government. A sustained reduction in PETRONAS' dividend payments remains contingent on government policy and financial requirements. Significant Medium-Term Capex: Capex will remain relatively high under our base-case scenario, despite the company's planned capex reductions. Under our base-case assumptions, PETRONAS will reduce capex to around MYR55bn in 2016 (2015: MYR64.7bn), down by 15% from 2015 levels. We expect PETRONAS' capex to increase to MYR57bn in 2017 and to MYR60bn in 2018 under a slowly recovering oil price scenario as per our price deck. The share of capex in the downstream business is likely to rise sharply to around half of its total capex through to 2019, largely due to the RAPID project. The USD16bn RAPID project in Malaysia consists of a refinery (capacity of 300,000 boe/d), a naptha cracker plant and other petrochemical facilities (combined production capacity of 3 million tonnes a year of ethylene, propylene and olefin products). Once completed, it will increase the company's refining capacity by over 50% and its petrochemical capacity by around 50%, as well as broaden the company's product range, notably in specialty chemicals. The commissioning of the refinery is targeted for early 2019, while the associated petrochemical plants will be phased in. Near-Term Negative FCF: We expect FCF to remain negative in the near term under our oil price deck assumptions, and given the company's high committed capex and dividend payments. PETRONAS' financial flexibility remains strong, however, with a net cash position of MYR62bn in 2015, FFO-adjusted net leverage of negative 0.7x, FFO gross leverage of 1.1x and FFO interest cover of 27x. We expect these ratios to improve further over 2017-2019 as oil and gas prices slowly recover. DERIVATION SUMMARY PETRONAS's IDRs are constrained by Malaysia's IDRs (A-/Stable) as the company is 100%-owned by the state and the government can exert significant influence over its operating and financial policies. PETRONAS' size and fully integrated business model, and diversification are comparable to European oil and gas production peers, such as Total SA (AA-/Negative) and Royal Dutch Shell (AA-/Negative), and in Asia with China National Petroleum Corporation (CNPC, A+/Stable) which has a standalone credit profile of 'AA-'. PETRONAS' financial profile - conservative through-the-cycle leverage and coverage ratios and strong net cash position - is the most robust of its peer group, and commensurate with a mid-'AA' category. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Oil price based on Fitch's Brent price deck of USD45 a barrel in 2017 and USD55 a barrel in 2018 - Annual dividend payment of MYR16bn in 2016 and MYR13bn in 2017 - Annual capex of MYR55bn-60bn over 2016 to 2018 RATING SENSITIVITIES Future developments that may, individually or collectively, lead to positive rating action - Upgrade of Malaysia's Foreign- and Local-Currency IDRs Future developments that may, individually or collectively, lead to negative rating action - Downgrade of Malaysia's Foreign- and Local-Currency IDRs For the sovereign rating of Malaysia, the following sensitivities were outlined by Fitch in its Rating Action Commentary of 1 September 2016: The main factors that could, individually or collectively, lead to a negative rating action are: - Deterioration in political stability or governance that leads to a weakening of credibility of policy-making institutions - Deterioration in fiscal discipline and broader public finances leading to higher government debt and deficit ratios - A further weakening of the balance of payments that strains domestic economic and/or financial stability The main factors that could, individually or collectively, lead to a positive rating action are: - Sustained reductions in government debt ratios or contingent liabilities - Narrowing of structural weaknesses relative to peers, including GDP per capita and governance standards Contact: Primary Analyst Sajal Kishore Senior Director +61 2 8256 0321 Fitch Australia Pty Ltd Level 15, 77 King Street, Sydney NSW 2000 Secondary Analyst Isabelle Katsumata Director +65 6796 7226 Committee Chairperson Buddhika Piyasena Senior Director +65 6796 7223 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. 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