Published on 30 Dec 2021.
RAM Ratings has reaffirmed the AAA/Stable/P1 corporate credit ratings (CCRs) of state-owned Petroleum Sarawak Berhad (PETROS or the Group). Concurrently, we have reaffirmed the AAA/Stable rating of the Multi-Currency Islamic Medium-Term Notes of up to RM15 billion (2021/2051) issued by Petroleum Sarawak Exploration & Production Sdn Bhd (PSEP), a wholly owned subsidiary of PETROS.
The CCRs and sukuk rating mirror Sarawak’s State Implicit Strength in view of the Group’s strategic importance in spearheading the development of the state’s sizeable oil & gas (O&G) reserves. We expect PETROS to derive ready financial assistance if required as well as regulatory support from the Sarawak state government (SSG).
Although a newly established O&G company, PETROS’s planned investments into upstream mature assets make operating risk manageable. As such, PETROS is not exposed to the high-risk exploration and greenfield development phases of the upstream business. Mature assets will generate cashflow from the outset, unlike greenfield ventures.
PETROS, through PSEP, completed the acquisition of respective 50% and 20% participating interests in two separate production sharing contracts on 1 January 2021. For 1H FY Dec 2021, the Group registered revenue and pre-tax profit of RM569.3 mil and RM168.2 mil, respectively, with a commendable operating profit before depreciation, interest and tax (OPBDIT) margin of 68%. Upon completion of remaining investments by fiscal 2024, annual revenue and OPBDIT should exceed RM3.5 bil and RM1.5 bil, respectively.
The remaining earmarked investments will be spaced out for now, owing to high crude oil prices. In tandem with funding needs for upstream investments and capital expenditure (capex), PETROS’s debts are anticipated to rise significantly in the coming years. We expect gearing to be around 2.2 times before easing in FY Dec 2025. On the back of healthy operating profits, we expect PETROS’s debt to OPBDIT ratio to stay fairly healthy at 2.8 times on average throughout fiscal 2022-2025. Anticipated robust earnings and operating cashflow (OCF) over the same period will keep the Group’s projected average OCF debt cover and interest coverage strong at a respective 0.37 times and 10 times.
PETROS is exposed to the volatility of crude oil and natural gas prices. Following gradual economic recovery from the coronavirus outbreak, demand for the commodities picked up this year, lifting prices to new highs amid a tighter oil market. Prices are expected to soften next year as production regains momentum to meet higher consumption levels. Conversely, prolonged period of feeble prices will adversely affect the Group’s business and financial performance while weakening its ability to service financial obligations and fund capex. Although hefty investments for exploration and development are not required, the Group will still need to incur an average of RM800 mil in recurring annual capex to sustain O&G output, once earmarked investments are completed.
PETROS has been tasked with planning and developing Sarawak’s O&G sector, vested with the authority to do so by the SSG under the Ministers of the State Government (Assignment of Portfolios) Order, 2019. The Group is a state implementation vehicle under Sarawak’s Oil Mining Ordinance (OMO) 1958 (amended in July 2018) and 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 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 bridge inconsistencies between the PDA and the OMO on jurisdiction over Sarawak’s hydrocarbon resources, paving the way for closer cooperation going forward.
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Thong Mun Wai
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Ratings on Petroleum Sarawak Berhad