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Fundamental View

AS OF 17 Feb 2023
  • Pertamina enjoys very strong linkages with the Government of Indonesia (GoI) and is assured of extraordinary support in times of distress.

  • Although it boasts of low leverage levels, the company requires large capex spending which could exacerbate its already negative free cash flows.

  • Importing expensive raw materials (crude oil), due to the rally in global crude oil prices in 2022, has led to a squeeze in its margins for its downstream business.

  • However, higher Brent crude oil prices have helped to boost net realizations of its high-margin Upstream E&P business, thereby boosting profits.

Business Description

AS OF 17 Feb 2023
  • Pertamina is involved in a broad range of upstream and downstream oil, gas, geothermal and petrochemical operations.
  • In the upstream sector, it engages in the exploration, development and production and supply of crude oil, natural gas and geothermal energy.
  • As for the downstream sector, the company carries out refining, marketing and distribution of oil, gas, fuel products and petrochemical and other non-fuel products.
  • As of 31 December 2021, its total proved oil reserves stood at ~1,285 mmbbl (mn barrels of oil) and gas reserves stood at ~899 mmboe (mn barrels of oil equivalent). Its average daily oil and gas production was ~897,000 boe per day in FY21. The company owns and operates 6 refineries in Indonesia.
  • Under the Public Service Obligation (PSO) mandate, Pertamina is responsible for providing certain grades of motor gasoline, automotive diesel oil, kerosene and LPG at subsidized prices. The subsidized retail price is often times lower than the cost of production, creating a shortfall, for which it receives reimbursements from the GoI.

Risk & Catalysts

AS OF 17 Feb 2023
  • Pertamina’s profitability is materially affected by volatility in oil & gas prices. Prolonged periods of low oil prices could harm the viability of upstream/E&P projects. As for downstream projects, input costs increase considerably when oil prices are peaking; owing to the rally in crude oil prices, Pertamina saw a contraction in its operating margins in FY21. Considering Brent crude prices rallied in 2022 (and remain elevated in 2023), this trend is expected to persist. Additionally, since retail prices of certain fuel products are regulated, realized prices may be below its cost of goods.

  • The company has to initially absorb the shortfall between the regulated retail price and the cost of producing and distributing certain fuel products. However, if the price of crude oil exceeds the price ceiling set by the GoI, the company may receive insufficient subsidy reimbursements.

  • The company’s capex needs typically remain elevated, which pressurizes its FCF generation and hence leverage too.

Key Metrics

AS OF 17 Feb 2023
$ mn FY21 FY20 FY19 FY18 FY17
Debt to Book Cap 41.2% 38.5% 36.2% 40.0% 35.9%
Net Debt to Book Cap 21.9% 18.9% 22.4% 21.5% 20.7%
Debt/Total Equity 70.0% 62.5% 56.8% 66.6% 56.1%
Debt/Total Assets 29.9% 28.3% 26.4% 30.5% 26.4%
Gross Leverage 2.5x 2.4x 2.2x 2.1x 1.9x
Net Leverage 1.3x 1.2x 1.3x 1.2x 1.1x
Interest Coverage 8.7x 7.8x 8.1x 10.3x 9.1x
EBITDA Margin 16.0% 19.9% 14.9% 15.9% 17.4%
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CreditSights View

AS OF 17 Feb 2023

We have an Underperform recommendation on Pertamina. Its bonds have tightened significantly over the past month, and now trade around 100 bp tighter than its peer PLN for like-to-like bonds. We think Pertamina should trade only 30-50 bp tighter than PLN. Though Pertamina boasts a better net leverage and liquidity than PLN, both companies perform a crucial public service and benefit from extraordinary state support. Pertamina also faces a worsening fundamental outlook for next year; considering the majority of Pertamina’s EBITDA is generated from its Upstream (E&P) business, cooling Brent crude oil prices could moderate EBITDA generation downwards in 2023. Capex typically remains elevated and in excess of its operating cash flow generation.   

Recommendation Reviewed: February 17, 2023

Recommendation Changed: December 09, 2022

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