Petronas clobbered by Moody’s downgrade

Malaysia’s Petronas has had its corporate ratings downgraded by Moody’s on its “close credit linkages with the government of Malaysia” and lack of geographical diversity in its asset base. 

In a note to clients, the rating agency said close credit linkages between Petronas and the Malaysian government are evidenced by the government's 100% ownership of the company; the fact that about two-thirds of the company's assets, production and reserves are based in Malaysia; and the government's dependence on the petroleum sector for nearly 20% of its revenue (excluding special dividends) on an ongoing basis.

Moody’s added the close linkages were also evident in November 2018, when the Malaysian government announced that Petronas will pay one-off special dividends of MYR30bn (£5.7bn) to the government to fund certain tax refunds. 

“Although the company has demonstrated strong fundamentals and continues to maintain a liquidity position that can support the dividend payments, a further request, especially if there is an increase in government's funding needs, cannot be ruled out.”

Furthermore, Petronas’ business and financial risk profiles could also be affected by the potential changes to the Malaysian government policies on the oil and gas sector. The ongoing review of the implementation of the Malaysia Agreement of 1963 (MA63), could provide more rights to the states of Sabah and Sarawak over their natural resources and oil and gas reserves. 

Implementation of this will require changes in the Petroleum Development Act of 1974 (PDA 1974). The impact and timing of such changes for Petronas remain uncertain at this stage.

In light of the said factors, Moody's has downgraded to A2 from A1 the domestic issuer and foreign currency senior unsecured ratings of Petronas, but has changed the outlook to ‘stable’ on the lower rating from ‘negative’. 

"Even though Petronas' credit metrics remain strong for its ratings, the close credit linkages between the government of Malaysia (A3 stable) and Petronas cannot support a rating for the company, under our methodology, that is two notches higher than the Malaysian sovereign," said Vikas Halan, a Moody's Senior Vice President.

“The company's ties to the sovereign create potential for government interference that may have a negative impact on the company's business profile or cash flow.”

However, Petronas’ strong credit metrics, its low dependence on the domestic economy - with 70% of its revenue generated through exports and overseas - and its “superior access to the international capital markets”, mean its ratings can be maintained one notch above the sovereign rating, Halan concluded.

The rating is based on Moody's oil price assumption of $50-$70 per barrel through 2020.