Moody's downgrades Petronas outlook to 'negative' from 'stable'

PETALING JAYA: Moody's Investors Service has downgraded Petroliam Nasional Bhd's (Petronas) ratings outlook to "negative" from "stable" due to higher dividend payout to the government.
"The negative outlook on Petronas' ratings reflects our view that the financial profile of Petronas may deteriorate if the government continues to ask the company to keep dividend payments high, especially should oil prices decline," Moody's senior vice-president Vikas Halan said in a statement today.
"Such a situation would no longer support a ratings level for the company that is currently two notches above that of the sovereign.
In such a scenario, Petronas' ratings could be constrained to no more than one notch above that of the sovereign," he added.
Nonetheless, Moody's has affirmed the "A1" domestic issuer and foreign currency senior unsecured ratings of Petronas.
Petronas will pay dividends of RM26 billion in 2018 and RM54 billion (inclusive of a one-off special dividend of RM30 billion) in 2019 to help the goverment fully settle the outstanding tax refunds estimated at RM37 billion.
Moody's said although Petronas can support the dividend payments announced in Budget 2019 and still maintain a net cash position, a further increase in regular dividend payments cannot be ruled out especially if there is an increase in government funding needs.
"High shareholder returns will reduce the company's ability to absorb the volatility in crude oil prices and constrain its financial flexibility."
Despite the high dividend payout, the rating agency expects Petronas will continue to invest in the growth of its production and reserves.
"Further, changes to the Malaysian government's policies for the oil & gas sector could affect Petronas' position as the sole owner of the  country's petroleum resources, and increase the royalties paid on its upstream oil & gas production.
"These changes could put pressure on the company's ratings, especially if Petronas is required to continue paying high dividends," said Halan, who is also Moody's lead analyst for Petronas.
Petronas' gross financial leverage — as measured by total debt/ebitda (earnings before interest, taxes, depreciation and amortisation) — improved to 0.7 times for the 12 months ended June 30, 2018 from about 1.0 times for 2016. Moody's expects the company to maintain its gross financial leverage below 0.8-1.0 times over the next two to three years.
Based on Moody's adjusted numbers, the company's net cash position — which rose to RM97 billion as at June 30, 2018 compared with RM42.8 billion on Dec 31, 2016 — will likely stay at RM75 billion to RM80 billion over the next two to three years, based on Moody's current oil price assumption of US$50-$70 a barrel through 2019.