KUALA LUMPUR: Fitch Ratings has downgraded Petronas’ long-term foreign- and local-currency issuer default ratings (IDRs) to ‘BBB+’ from ‘A-‘, with the outlook at stable.
In a statement today, Fitch said the rating action followed the downgrade of Malaysia’s IDR to ‘BBB+’ from ‘A-‘ on Dec 4, 2020, with the outlook at stable.
The ratings agency said Petronas accounted for more than 15% of the government’s revenue over the last five years.
“Fitch will equalise its ratings with those of the sovereign even if its standalone credit profile (SCP) falls below the sovereign rating so long as the company sustainably generates more than 10% of government revenue, in line with our criteria for rating government-related entities,” it added.
It noted that the downgrade was due to “strong” sovereign linkages, among others, as the government’s 100% ownership gave it significant influence over Petronas, although it was less involved directly in the company’s operations, financing and investments.
“Petronas benefits from exclusive rights to Malaysia’s oil and gas reserves by law. Petronas has not required tangible financial support and we expect financial support to be forthcoming, if necessary,” said the ratings agency.
Fitch said Petronas’ SCP remains comfortable as it expects the oil company to maintain its strong financial profile despite the economic downturn and disruptions following the Covid-19 pandemic.
“We estimate Petronas’ upstream volumes to fall by about 4% during 2020 due to weaker demand. We expect its liquefied natural gas, downstream petroleum and petrochemical sales volumes to fall by 2%-3% in 2020,” it added.
Fitch also expects a gradual economic recovery to support revival in demand for gas and petroleum products with volumes returning to pre-pandemic levels over the next 12-18 months, although downside risks remain.
On the Covid-19 impact, the ratings agency expects Petronas’ earnings before interest, taxes, depreciation and amortisation (Ebitda) to fall by about 40% in the financial year ending Dec 31, 2020 from RM87.4 billion in 2019, hit by weaker demand, low oil and gas prices and weak product spreads.
“Consequently, Petronas’ free cash flow deficit after capital expenditure (capex) and dividends will expand in 2020, though a plan to cut 2020 capex should cushion the impact,” said Fitch.