RAM Ratings assigns AAA ratings to Petroleum Sarawak and its proposed sukuk

Published on 27 Jan 2021.

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RAM Ratings has assigned corporate credit ratings (CCR) of AAA/Stable/P1 to Sarawak-state-owned Petroleum Sarawak Berhad (PETROS or the Group). Concurrently, we have assigned a AAA/Stable rating to the proposed Multi-Currency Islamic Medium-Term Notes of up to RM15 billion (2021/2051) to be issued by Petroleum Sarawak Exploration & Production Sdn Bhd (PSEP), a wholly-owned subsidiary of PETROS.

PETROS’s CCR and the rating of its proposed sukuk mirrors that of Sarawak’s (the State) state implicit strength, given its highly strategic role in spearheading the development of the State’s sizeable oil & gas (O&G) reserves. We also expect the Group to enjoy ready financial assistance if needed and regulatory support from the Sarawak State Government (SSG). Despite being a newly set-up O&G company, PETROS’s operating risk is manageable, thanks to planned investments into upstream matured assets. These assets are envisaged to provide robust earnings, translating into strong debt and interest coverages. The above strengths are offset by a leveraged balance sheet, given its hefty investments and ongoing capital expenditure (capex). PETROS’s earnings are also susceptible to the volatility of O&G prices.

Through PSEP, PETROS will acquire 50% stakes in five production sharing contracts (PSC) fully owned by PETRONAS as well as a 20% stake in a PSC jointly owned by PETRONAS and Sarawak Shell Bhd. Investments into the first two PSCs are targeted for completion by March 2021, while the rest will be staggered over four years to manage its cashflow. For now, the Group plans to focus on investments constituting farm-in arrangements for producing O&G fields. As such, PETROS is not exposed to high-risk exploration and greenfield development stages of the upstream business. Additionally, the producing assets will generate cashflow from the outset, unlike greenfield ventures. After the completion of these investments in fiscal 2024, the Group’s annual revenue and operating profit before depreciation, interest and tax (OPBDIT) is expected to exceed RM3.5 bil and RM1.5 bil, respectively.

PETROS’s debts are expected to rise significantly in the coming years in tandem with funding needs for its upstream investments and capex. Its gearing ratio is expected to be weak, peaking above 3 times in fiscal 2022, before improving on the back of accumulated profits. However, its debt-to-OPBDIT ratio, an alternative measure of financial leverage, is envisaged to stay fairly healthy at 3.1 times on average throughout fiscal 2021-2025. Given anticipated robust earnings and operating cashflow (OCF) over the same period, the Group’s average OCF debt cover and interest coverage is estimated at a respective 0.3 times and 10 times. 

Notwithstanding expected healthy earnings, PETROS is exposed to volatile crude oil and natural gas prices which are beyond its control. Amid the coronavirus outbreak and global lockdowns, demand for crude oil and natural gas slumped, driving prices to unprecedented lows. Since then, crude oil and natural gas prices had regained some ground, with the latter even staging a strong rally recently. Nonetheless, a prolonged period of feeble prices will adversely affect the Group’s business and financial performance while weakening its ability to service its financial obligations and fund its capex. The upstream O&G business is highly capital intensive. Although PETROS has bypassed the hefty investments required for exploration and developmental stages, it will still need recurring capex to sustain its O&G output.

PETROS has been tasked to plan and develop the O&G sector in Sarawak, with authority vested by the SSG under the Ministers of the State Government (Assignment of Portfolios) Order, 2019. The Group is the implementation vehicle for Sarawak’s Oil Mining Ordinance (OMO) 1958 (amended in July 2018) and the Distribution of Gas Ordinance 2016. PETROS aims to increase the State’s share of earnings from its vast O&G resources, which have been managed by Federal Government-owned Petroliam Nasional Berhad (PETRONAS) under the Petroleum Development Act 1974 (PDA). To this end, the SSG signed a commercial settlement agreement with PETRONAS on 7 December 2020, which helped to bridge inconsistencies between the PDA and the State’s OMO on jurisdiction over Sarawak’s hydrocarbon resources, paving the way for closer cooperation going forward.

Analytical contact
Ben Inn
(603) 3385 2510

Media contact
Padthma Subbiah
(603) 3385 2577


The credit rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment on the security’s market price or its suitability for a particular investor, nor does it involve any audit by RAM Ratings. The credit rating also does not reflect the legality and enforceability of financial obligations.

RAM Ratings receives compensation for its rating services, normally paid by the issuers of such securities or the rated entity, and sometimes third parties participating in marketing the securities, insurers, guarantors, other obligors, underwriters, etc. The receipt of this compensation has no influence on RAM Ratings’ credit opinions or other analytical processes. In all instances, RAM Ratings is committed to preserving the objectivity, integrity and independence of its ratings. Rating fees are communicated to clients prior to the issuance of rating opinions. While RAM Ratings reserves the right to disseminate the ratings, it receives no payment for doing so, except for subscriptions to its publications.

Similarly, the disclaimers above also apply to RAM Ratings’ credit-related analyses and commentaries, where relevant.

Published by RAM Rating Services Berhad
© Copyright 2021 by RAM Rating Services Berhad


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