President Joko Widodo injects capital Rp2.1 trillion (US$141.89 million) to PT Pertamina to improves the capital structure of state-owned energy producer - Photo by the Company

JAKARTA (TheInsiderStories) – Moody’s Investors Service expects PT Pertamina‘ capital spending over the next three years to average around US$7 billion annually as against $3 billion over the last three years, the rating agency said on Monday (01/13). The increase in capital spending will be driven by the company’s plan to increase refining capacity and efficiency.

“Also, Pertamina will start spending on the development of new oil and gas that has been awarded by the government in 2018 and 2019. This will result in an increase in the company’s total borrowings,” says Vikas Halan, a Moody’s Senior Vice President.

Consequently, Moody’s estimates that Pertamina‘s retained cash flow to net debt will deteriorate to 27-28 percent from about 38 percent for the 12 months ended September 2019 but will still remain supportive of its ratings. However, any delay in the disbursement by the government or continued price-freeze will result in further deterioration in Pertamina’s credit metrics.

The agency has also affirmed Pertamina‘s Baa2 issuer and senior unsecured bond ratings, Baa2 senior unsecured MTN ratings, and baa3 Baseline Credit Assessment (BCA). It also assigned a Baa2 rating to the proposed senior unsecured USD notes to be issued by Pertamina. The notes will be issued under Pertamina’s global medium-term note program and the proceeds will be used for capital spending and general corporate purposes. The rating outlook is stable.

“The rating affirmation reflects our expectation that Pertamina will maintain credit metrics that are supportive of its ratings, despite the increase in working capital outflow, due to delayed subsidy reimbursement and higher capital spending,” says Halan, who is also Moody’s Lead Analyst for Pertamina.

In 2018, the government agreed to reimburse Pertamina for the revenue shortfall arising from the difference between the government-regulated sale price and market-linked price for specific types of fuel. However, these reimbursements are not immediately accretive to cash inflow because they will be paid by installments on a deferred basis starting in 2020.

As of 30 September 2019, Pertamina had $5.3 billion of receivables from the government as against $2.2 billion as of 31 December 2017. The increase is largely on account of a delay in the receipt of compensation from the government for selling certain petroleum products at subsidized prices.

Pertamina’s Baa2 issuer rating primarily reflects its standalone credit quality, as captured in its baa3 BCA. The issuer rating reflects Pertamina’s strategically important position as Indonesia’s national integrated oil and gas company, contributing significant upstream production, and accounting for substantially all of the country’s refineries, fuel marketing stations, and gas pipelines.

At the same time, the rating also takes into account Pertamina’s exposure to an evolving regulatory environment in Indonesia and a high degree of execution risk associated with its sizable investment plan. The Baa2 issuer rating also incorporates Moody’s expectation of the very high likelihood of extraordinary support from the government to Pertamina in times of need and very high interdependence between the two parties.

Moody’s support assessment is based on Pertamina’s strategic importance, given its important role in oil and gas exploration, petroleum product distribution and gas distribution in the country, as well as the government’s close supervision of its strategies and budget.

For environmental factors, Pertamina’s issuer rating incorporates the environmental risk that the company is exposed to through its oil and gas businesses. Nevertheless, the risk is somewhat mitigated by the high proportion of natural gas in its production mix, which accounted for about 57 percent of its total oil and gas production in 2018.

With regard to social factors, Pertamina’s business mix includes sectors that are exposed to moderate to high social risks, especially issues related to responsible production and health and safety. This social risk is mitigated by the company’s long track record of operating its businesses without any major incidents.

As for governance factors, the issuer rating incorporates Pertamina’s status as a government-owned company, the government practice of appointing all of Pertamina’s Board of Commissioners and its significant control over the company’s operational and financial policies.

Pertamina has strong liquidity as of 30 September 2019 with cash and cash equivalent of $8.1 billion as against debt maturing over the next 12 months of $2.5 billion. The outlook on Pertamina’s ratings is stable, reflecting the stable outlook for Indonesia’s sovereign rating, as well as Moody’s expectation that Pertamina will manage its capital expenditure program, such that its financial metrics will remain supportive of its BCA.

Moody’s will upgrade Pertamina’s Baa2 issuer rating if Moody’s upgrades the Indonesian government’s Baa2 sovereign rating; the company’s BCA is maintained at least at the current baa3 level, and the support assessment incorporated in the rating remains unchanged.

Pertamina’s issuer rating may face downward pressure if Indonesia’s sovereign rating is lowered; the company’s BCA falls below ba2, or government ownership of Pertamina falls, or government control is reduced by some other means; factors which would require a reassessment of the level of government support incorporated into Pertamina’s ratings, Moody’s ended.

Written by Lexy Nantu, Email: