Fitch expects Petronas to pay a lower dividend of RM16bil in 2016, down from RM26bil in 2015 and RM29bil in 2014.
KUALA LUMPUR: Fitch Ratings has downgraded Petroliam Nasional Bhd's (Petronas) long-term foreign- and local-currency issuer default ratings (IDRs) to 'A-' from 'A'.
The interantional ratings agency had on Wednesday affirmed its short-term foreign-currency IDR at 'F1'. The outlook on the long-term IDRs is stable.
“At the same time, Fitch has downgraded Petronas' foreign-currency senior unsecured rating and the ratings on debt issued by Petronas Capital Ltd and guaranteed by Petronas to 'A-' from 'A'.
“However, Petronas continues to maintain a strong standalone credit profile, assessed by Fitch at 'AA-'.”
Fitch said the rating actions follow the downgrade of Malaysia's long-term local-currency (LTLC) IDR to 'A-' from 'A', in line with the updated guidance contained in Fitch's revised Sovereign Rating Criteria dated July 18.
Fitch said Malaysia's credit profile no longer supports a notching up of the LTLC IDR above the long-term foreign-currency IDR.
“This reflects Fitch's view that neither of the two key factors cited in the criteria that support upward notching of the LTLC IDR are present for Malaysia.
“Those two key factors are: (i) strong public finance fundamentals relative to external finance fundamentals; and (ii) previous preferential treatment of local-currency creditors relative to foreign-currency creditors,” it said.
Fitch said Petronas IDRs are constrained by Malaysia's IDRs. The reasons in support of Malaysia's LTLC IDR downgrade also weaken the case for rating Petronas' foreign-currency obligations above the sovereign foreign-currency rating.
Petronas is 100%-owned by Malaysia and the government can exert significant influence over its operating and financial policies.
“Despite weakened oil and gas prices, Petronas continues to maintain a strong 'AA-' standalone credit profile. The rating headroom for its standalone profile has, however, narrowed due to pressure on operating cash generation from sustained low oil prices, and the likely slow recovery of prices over the forecast period, despite a reduction in dividend payout.
“Malaysia has reduced its expectations for dividends from Petronas in the current low oil price environment which benefits the company's financial profile. Petronas' rating also benefits from significant capex and opex savings announced by the company totalling RM50bil through 2020.
Fitch expects Petronas to pay a lower dividend of RM16bil in 2016, down from RM26bil in 2015 and RM29bil in 2014.
“With this reduction in dividends, Fitch expects Petronas to meet a majority of its capex from internal cash generation, even though operating cash generation is likely to be weaker due to low commodity prices. However, in Fitch's view, Petronas will continue to make sizeable contributions to the government's revenue. Any sustained reduction in its dividend payments remains predicated on the government's policy and its financial requirements given the government's reliance on Petronas for state revenue.
Significant Medium-Term Capex: Fitch expects PETRONAS' capex programme to remain significant, including capex on the downstream Refinery and Petrochemical Integrated Development (RAPID) project in Malaysia and the liquefaction and production facilities associated with its Canadian joint venture, Pacific NorthWest LNG project.
Fitch expects Petronas' free cash flows (FCF) to remain weak, reflecting the expected slow recovery of oil prices, high committed capex and dividend payments.
Petronas' financial flexibility, however, remains strong as it benefits from lower dividend payments in 2015 and 2016, as well as lower funding costs for its US$5bil bond issuance in March 2015.
Petronas also had substantial cash balances of RM116bil at March 31, 2016, and was in a net cash position given its relatively low indebtedness of about RM54bil.
Its leverage, as measured by funds from operations (FFO)-adjusted net leverage, was negative at 0.7 times (a net cash position), and its FFO interest coverage was at 27 times for 2015.
Fitch's key assumptions within its rating case for the issuer include oil price based on Fitch's Brent price deck of US$33 barrel (bbl) in 2016, US$45 in 2017 and US$55 in 2018
It also assumes dividend payment of RM16bil in 2016 while capex to average RM50bil over 2016 to 2018.
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