(The following statement was released by the rating agency) SYDNEY/SINGAPORE, July 01 (Fitch) Fitch Ratings has revised the Outlook on Petroliam Nasional Berhad's (PETRONAS) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) to Stable from Negative. The Long-Term Foreign- and Local-Currency IDRs have been affirmed at 'A'. The Short-Term Foreign-Currency IDR has also been affirmed at 'F1'. At the same time, Fitch has also affirmed the Malaysian state-owned energy company's foreign-currency senior unsecured rating at 'A', including debt issued by PETRONAS Capital Limited and guaranteed by PETRONAS. This follows the revision of Outlook on Malaysia's Foreign- and Local-Currency IDRs to Stable from Negative and the affirmation of the country's Foreign-Currency IDR at 'A-', Local-Currency IDR at 'A' and Country Ceiling at 'A' on 30 June 2015. KEY RATING DRIVERS Ratings Constrained by Sovereign: PETRONAS' Foreign- and Local-Currency IDRs are constrained by Malaysia's Country Ceiling and Local-Currency IDR, respectively. PETRONAS is 100%-owned by Malaysia and the government can exert significant influence over PETRONAS' operating and financial policies. Foreign-Currency IDR at Country Ceiling: Fitch believes that PETRONAS' importance in generating foreign currency for Malaysia warrants a foreign-currency rating at Malaysia's Country Ceiling . PETRONAS' Foreign-Currency IDR will continue to be rated higher than Malaysia's at its Country Ceiling, on the condition that PETRONAS will continue to maintain its strong standalone financial profile, without material deterioration, after satisfying its financial commitments to the state, according to Fitch's view. Very Strong Standalone Profile: Despite the heavy financial commitments imposed by the government, along with weakened oil and gas prices, PETRONAS continues to maintain a strong standalone credit profile. Fitch considers PETRONAS to be Malaysia's strongest foreign currency debtor. Its leverage, as measured by funds from operations (FFO)-adjusted net leverage, was negative at 0.7x (a net cash position), and its FFO interest coverage was at 49x for 2014. Dividend Policy Change Unlikely in the Medium-Term: Fitch expects a lower dividend payment of MYR26bn in 2015, down from MYR29bn in 2014. However, in Fitch's view, the Malaysian government is unlikely to accept a materially lower dividend from PETRONAS over the foreseeable future, given the government's financial requirements. Any changes to its dividend policy are predicated on the government's policy and its financial requirements given the company's significant contributions to the government's revenue. Significant Medium-Term Capex: PETRONAS' next major capex project will be for the liquefaction/production facilities associated with its Canadian joint venture, the Pacific NorthWest LNG project, following a final investment decision on 11 June 2015, which is conditional on receipt of final environmental approval. Its funding needs associated with this venture will benefit if it dilutes its equity share from 62%. Material capex is also expected for the downstream Pengerang Integrated Complex project in Malaysia. Near-Term Negative Free Cash Flows: Fitch expects post-capex and dividend free cash flows to be negative in 2015 and 2016. This reflects lower earnings due to the agency's assumptions for low oil prices, high ongoing capex, and dividend payments. Fitch, however, expects PETRONAS' free cash flows to remain largely neutral over the cycle based on the agency's long-term oil price deck and expectations of lower operating costs. PETRONAS' financial flexibility is strong, which further benefits from a lower dividend payment in 2015 as well as low funding costs achieved in its USD5bn bond issuance in March 2015. The company's liquidity is also strong, as reflected in its cash balances of MYR134bn against its balance sheet debt of only about MYR55bn as at 31 March 2015. KEY ASSUMPTIONS - Oil price based on Fitch's Brent price deck - Dividend payment of MYR26bn in 2015 - Capex of MYR70bn in 2015 RATING SENSITIVITIES Positive: Future developments that may, individually or collectively, lead to positive rating action include: - Upgrade of Malaysia's Foreign- and Local-Currency IDRs and its Country Ceiling. Negative: Future developments that may, individually or collectively, lead to negative rating action include: - Downgrade of Malaysia's Local-Currency IDR and its Country Ceiling. - Changes to the government's policies and financial requirements on the company, leading to a sustained deterioration of PETRONAS' currently very strong standalone credit profile will result in the company's Long-Term Foreign-Currency IDR being downgraded to the same level as the Foreign-Currency IDR of Malaysia. For the sovereign rating of Malaysia, the following sensitivities were outlined by Fitch in its Rating Action Commentary of 30 June 2015: The Stable Outlooks reflect Fitch's assessment that upside and downside risks to the ratings are currently broadly balanced. The main factors that could, individually or collectively, lead to a negative rating action are: - Fiscal slippage relative to the government's targets and lack of progress on structural budgetary reform. - Problems for the banking sector potentially derived from a shock to interest rates or employment sufficient to impair the sovereign's debt service capacity. - Deterioration in the balance of payments or investor sentiment that impairs the sovereign's external balance sheet. The main factors that could, individually or collectively, lead to a positive rating action are: - Greater confidence on the resilience and pace of deficit reduction and the government's commitment to contain public indebtedness. - Sustained growth without the build-up of macro imbalances. - Narrowing of structural weaknesses relative to peers including development indicators and governance. Contact: Primary Analyst Sajal Kishore Director +612 8256 0321 Fitch Australia Pty Ltd., Level 15, 77 King Street, Sydney NSW 2000 Secondary Analyst Buddhika Piyasena Senior Director +65 6796 7223 Committee Chairperson Steve Durose Managing Director +612 8256 0307 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 28 May 2014) https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393 Country Ceilings (pub. 28 Aug 2014) https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=752194 Additional Disclosures www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.
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