Fitch keeps negative outlook on Petronas' long-term credit rating

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KUALA LUMPUR (Sept 23): Fitch Ratings has maintained the outlook on Petroliam Nasional Bhd’s (Petronas) long-term issuer default ratings (IDR) as “negative”, despite commending the oil giant’s credit profile as Petronas is wholly-owned by the Malaysian government, which can exert significant influence over the group’s operating and financial policies.

The global rating agency affirmed Petronas’s foreign-and local-currency IDRs at “A”, and short-term foreign-currency IDR at “F1”, with the long-term IDRs’ outlook as “negative”.

“Petronas’s foreign- and local-Currency IDRs are constrained by Malaysia's 'A' country ceiling and 'A' local-currency IDR, respectively. Petronas is 100%-owned by Malaysia (A-/A/Negative) and the government can exert significant influence over Petronas’s operating and financial policies,” Fitch said in a statement yesterday.

The rating agency added that as Petronas’ credit rating hinges on the government-imposed constraints, the only positive measure that could lead to a re-rating is the stabilisation of Malaysia’s sovereign rating outlook.

Inversely, what could lead to negative ration action includes the downgrade of Malaysia’s local-currency IDR and its country ceiling, and changes to the government’s policies which will lead to a sustained deterioration of Petronas’s “very strong standalone credit profile”.

“Despite the heavy financial commitments imposed by the government, Petronas continues to maintain a strong standalone credit profile. Fitch considers Petronas to be Malaysia's strongest foreign currency debtor,” it said.

The rating agency opined that Petronas’ revenue growth last year and in the first half of this year reflects the strong increase in oil and gas production volume and higher liquefied natural gas sales volume.

“Fitch expects 2014 revenue and earnings before interest, taxes, depreciation, and amortisation to also benefit from price recovery for gas sales to the Malaysian power sector because the fuel cost price pass-through (FCPT) mechanism was restarted in January 2014. Its leverage, as measured by funds from operations (FFO)-adjusted net leverage, was negative at 0.8 times (a net cash position), and its FFO interest coverage was at 38 times for 2013,” Fitch explained.

The rating agency also said that Petronas’s cash generation could be improved by gas pricing reforms, as the government had restarted the FCPT mechanism in January this year, which will allow for an assessment of the regulated tariff for electricity every six months.

Nonetheless, Fitch said it is unlikely that the government will accept a lower dividend from Petronas in the short to medium term, given the group’s significant contributions to the government’s coffers, despite Petronas’s expectation that future dividend payout ratio to reduce.