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Sub-sector: Oil and Gas
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Fundamental View
AS OF 17 Sep 2024Petronas’ FY23 and 1H24 credit metrics remained resilient even as EBITDA fell as we had expected.
Despite the modestly lower YoY outlook for O&G price realizations in 2H24, we expect Petronas’ credit profile to remain resilient in FY24 and maintain its net cash position, aided by resilient domestic demand and still-positive FCFs.
We take comfort in Petronas’ strong support from the Government of Malaysia, given it is strategically vested with Malaysia’s entire oil & gas resources and provides a substantial source of government income.
Sizable O&G and renewable capex and high dividend payouts could restrain improvements in Petronas’ credit metrics and free cash flows.
Business Description
AS OF 17 Sep 2024- Petronas is an integrated oil and gas company, wholly owned and controlled by the Government of Malaysia.
- Its activities span the entire up/mid/downstream value chain both domestically and internationally. Key products and services provided include the sale and marketing of petroleum products, crude oil and condensates, LNG, natural and processed gas, petrochemicals, shipping services, property development and automotive engineering.
- Petronas carries out its exploration, development and production activities via production sharing contracts (“PSCs”), mostly with international O&G companies and Petronas' wholly-owned subsidiaries.
- Its Downstream segment is aimed at refining, supplying, trading, manufacturing and marketing of crude oil, petroleum products, and petrochemical products. Its key projects and factories include Pengerang Integrated Complex (PIC), Sabah Ammonia Urea in Sabah, and Integrated Aroma Ingredients Complex in Gebeng, Kuantan.
- Its Gas and New Energy division was set up in FY19 and groups all of Petronas' LNG, gas and renewable revenues into a single segment. Activities within this division include production of LNG, processing and transportation of gas and solar power production.
- Its 6 listed subsidiaries include MISC Berhad (57.56%), KLCC Property (75.46%), Petronas Chemicals Group Berhad (64.35%), Petronas Gas Berhad (51%), Petronas Dagangan Berhad (63.94%), and Bintulu Port Holdings Berhad (28.52%).
Risk & Catalysts
AS OF 17 Sep 2024Broad growth slowdown concerns could hamper sales of Petronas’ Downstream (petroleum products) and Gas & New Energy (LNG and natural gas) segments.
Prolonged periods of low crude oil prices could harm upstream O&G EBITDA (which typically contributes 50%-70% of total profit after tax), albeit mitigated partly by stronger downstream O&G EBITDA.
Sizable capex on domestic O&G and renewable energy ventures could restrain improvements in Petronas’ credit metrics and free cash flows.
Petronas is regularly required to pay dividends to the Government of Malaysia, which may weigh on its cash flows.
We remain watchful of how the dispute between Petronas and Sarawak state government unfolds, its impact on Petronas’ financials and its market position in the Malaysian O&G sector.
Key Metric
AS OF 17 Sep 2024| MYR mn | FY21 | FY22 | FY23 | 1H23 | 1H24 |
|---|---|---|---|---|---|
| Debt to Book Cap | 21.1% | 18.4% | 18.2% | 19.1% | 18.6% |
| Net Debt to Book Cap | n/m | n/m | n/m | n/m | n/m |
| Debt/Total Equity | 26.7% | 22.6% | 22.2% | 23.6% | 22.8% |
| Debt/Total Assets | 17.0% | 14.7% | 14.4% | 14.9% | 14.3% |
| Gross Leverage | 1.1x | 0.6x | 0.8x | 0.7x | 0.8x |
| Net Leverage | n/m | n/m | n/m | n/m | n/m |
| Interest Coverage | 20.9x | 33.9x | 24.9x | 31.2x | 25.5x |
| EBITDA Margin | 45.2% | 50.7% | 44.8% | 46.0% | 44.1% |
CreditSight View Comment
AS OF 17 Sep 2024We have a Market perform recommendation on Petronas. We see current spread differential of Petronas’ bonds against Pertamina’s bonds as fair. We think Petronas’ larger EBITDA, net cash position vs. Pertamina’s net leverage position and more regular/transparent financial reporting negates Indonesia’s relatively stronger FY24E GDP growth. The Petronas vs. Sarawak state dispute is an evolving issue, and we remain watchful of any major adverse outcome to revisit our recommendation. Despite the modestly lower YoY outlook for O&G price realizations in 2H24, we expect Petronas’ credit profile to remain resilient in FY24 and maintain its net cash position, aided by resilient domestic demand and still-positive FCFs. We also like its strong state-linkage to the Malaysian government.
Recommendation Reviewed: September 17, 2024
Recommendation Changed: September 07, 2020
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Search topics about wealth insights and investments.Petron
- Sector: Energy
- Sub Sector: Oil and Gas
- Country: Philippines
- Credit Rating (Moody’s/Standard & Poor’s/Fitch): M/P
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Fundamental View
AS OF 22 Aug 2024Petron’s 1H24 results were in line with our expectations, and we expect Petron’s credit metrics to worsen modestly through 2H24 as higher capex could offset low single digit % EBITDA growth amid modestly higher crude oil input costs.
About two-third of its total revenues are derived from the Philippines and are indexed to Dubai crude prices, which allows for smooth cost pass-throughs and good insulation from crude price volatility.
Free cash flows are typically negative due to inventory fluctuations that outweigh low capex.
Business Description
AS OF 22 Aug 2024- Petron is the largest oil refining and retailing company in the Philippines, and the third largest player in Malaysia. It maintains a 24% market share in the Philippines (followed by Shell and Caltex) and a 20% market share in Malaysia (largest being Petronas), based on total fuel sales volumes.
- Petron has a total refining capacity of 268k barrels/day (bpd) and accounts for about 30% of the Philippines' fuel needs. Its petroleum refining facilities include the Limay Refinery in Bataan, Philippines (capacity of 180k bpd; 67% of total) and the Port Dickson Refinery in Negeri Sembilan, Malaysia (capacity of 88k bpd; remaining 33% of total).
- Petron's refineries process crude oil into a full range of petroleum products including gasoline, diesel, LPG, jet fuel, kerosene and petrochemicals.
- It further markets and retails these fuel products through its fuel service stations located across the Philippines (2,400 outlets) and Malaysia (700 outlets).
- Petron sources its crude oil supplies from third-party suppliers, namely Saudi Aramco, Kuwait Petroleum Corporation and Exxon Mobil, which are bought on the basis of term contracts and in the spot market.
- Petron mainly supplies its petroleum and fuel products to customers in Malaysia and the Philippines (~95% of annual revenue).
- Petron is 68% owned by San Miguel Corporation (SMC), one of the largest and most diversified conglomerates in the Philippines based on total revenues and assets. SMC's CEO, Mr. Ramon Ang, is also Petron's CEO.
Risk & Catalysts
AS OF 22 Aug 2024Petron cannot fully pass on higher crude oil input costs to customers in Malaysia.
Petron operates in low-margin business (EBITDA margins ~5%) and maintains elevated credit metrics.
Petron is highly dependent on its Limay petroleum refining complex that makes up two-thirds of its total refining capacity (67%). Any events that disrupt the refinery’s operations could adversely affect Petron’s total revenues.
Key Metric
AS OF 22 Aug 2024| PHP bn | FY21 | FY22 | FY23 | 1H23 | 1H24 |
|---|---|---|---|---|---|
| Debt to Book Cap | 72.3% | 74.0% | 75.1% | 72.5% | 74.1% |
| Net Debt to Book Cap | 63.3% | 65.5% | 68.2% | 62.6% | 66.5% |
| Debt/Total Equity | 261.6% | 284.2% | 301.4% | 263.3% | 285.8% |
| Debt/Total Assets | 71.2% | 70.2% | 67.6% | 66.6% | 65.1% |
| Gross Leverage | 11.2x | 10.9x | 7.1x | 9.8x | 6.8x |
| Net Leverage | 9.8x | 9.7x | 6.5x | 8.5x | 6.1x |
| Interest Coverage | 2.5x | 2.2x | 2.2x | 1.7x | 2.1x |
| EBITDA Margin | 5.9% | 3.4% | 5.3% | 5.7% | 5.1% |
CreditSight View Comment
AS OF 22 Aug 2024We maintain our Market perform recommendation on Petron. Petron’s c.Apr-2026 perp trades 32 bp tighter than SMC c.Jul-2025 perp, which we see as fair given its Opco structure vs. SMC’s Holdco, its cost pass-through mechanisms, and low capex which more than offset SMC’s larger diversified businesses. Overall, we continue to take comfort in Petron’s resilient credit profile, supported by a good cost-passthrough contractual mix that provides good insulation from crude price volatility. While we expect credit metrics to worsen modestly in FY24 from poorer EBITDA and higher capex, we expect the impact to be mitigated by robust domestic demand and further ~PHP 15 bn of preference share issuances.
Recommendation Reviewed: August 22, 2024
Recommendation Changed: January 26, 2022
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Search topics about wealth insights and investments.Pertamina Persero PT
- Sector: Energy
- Sub Sector: Oil and Gas
- Region: Indonesia
- Bond: PERTIJ 3.1 30
- Indicative Yield-to-Maturity (YTM): 4.782%
- Credit Rating (Moody’s/Standard & Poor’s/Fitch): ( Baa3 / - / BBB)
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Fundamental View
AS OF 27 Jun 2024- Pertamina enjoys very strong linkages with the Government of Indonesia (GoI) and is assured of extraordinary support in times of distress.
- Slightly higher YoY FY24E Brent crude prices could lift upstream margins and overall EBITDA (given the upstream business accounts for >65% of consolidated EBITDA).
- Although leverage typically remains low, Pertamina incurs large capex spending that could pressure its free cash flow generation.
- High persisting dividend outflows could restrain free cash flow improvements.
Business Description
AS OF 27 Jun 2024- 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 2022, its total proved oil reserves stood at ~1,289 mmbbl (mn barrels of oil) and gas reserves stood at ~817 mmboe (mn barrels of oil equivalent). Its average daily oil and gas production was ~1,044,000 boe per day in FY23. 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 27 Jun 2024- Pertamina’s profitability is materially affected by volatility in oil & gas prices. Prolonged periods of low oil prices could hurt upstream earnings that form the bulk of overall EBITDA (>65%).
- As retail prices of certain fuel products are regulated, realized prices may be below its cost of sales.
- Pertamina has to initially absorb the shortfall between the regulated retail price and the cost of producing and distributing certain fuel products. If the price of crude oil exceeds the price ceiling set by the GoI, the company may receive insufficient subsidy reimbursements.
- Capex typically remains elevated and which pressurizes its free cash flow generation.
Key Metric
AS OF 27 Jun 2024| $ mn | FY19 | FY20 | FY21 | FY22 | FY23 |
|---|---|---|---|---|---|
| Debt to Book Cap | 36.2% | 38.5% | 41.2% | 42.1% | 37.6% |
| Net Debt to Book Cap | 22.4% | 18.9% | 21.9% | 12.5% | 8.5% |
| Debt/Total Equity | 56.8% | 62.5% | 70.0% | 72.7% | 60.4% |
| Debt/Total Assets | 26.4% | 28.3% | 29.9% | 30.8% | 27.4% |
| Gross Leverage | 2.2x | 2.4x | 2.5x | 1.9x | 1.9x |
| Net Leverage | 1.3x | 1.2x | 1.3x | 0.6x | 0.4x |
| Interest Coverage | 8.1x | 7.8x | 8.7x | 11.2x | 8.9x |
| EBITDA Margin | 14.9% | 19.9% | 16.0% | 16.7% | 17.7% |
CreditSight View Comment
AS OF 27 Jun 2024We have a Market perform recommendation on Pertamina. We think Pertamina should trade 40-50 bp tighter than Indonesian SOE PLN as Pertamina’s lower net leverage, less material ESG concerns, and potential regulatory changes to improve the efficiency of the power sector that would affect PLN adversely. We remain comfortable with Pertamina’s credit profile aided by its strong government backing and expectations of slightly higher YoY FY24 average Brent crude prices that could support upstream margins (FY23 credit metrics: 1.9x/0.4x). Capex remains elevated amid a ramp up in energy transition goals.
Recommendation Reviewed: June 27, 2024
Recommendation Changed: May 16, 2023
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Fundamental View
AS OF 18 Jun 2024KORGAS is Korea’s sole integrated gas utility company and a quasi-sovereign credit in Korea with an effective monopoly over the exploration & production (E&P), procurement, storage & production, transmission and wholesale distribution of natural gas.
Its credit profile is underpinned by its dominant market position in Korea’s natural gas and hydrogen utility market, and the strong support from the Korean government. This partly mitigates its delayed and incomplete pass-through of gas procurement costs when natural gas price surges, such as in FY22.
We expect its credit profile to improve in FY24 supported by lower natural gas procurement costs and higher gas tariffs, which would partially mitigate concerns over its larger capex planned for FY24 and FY25.
Business Description
AS OF 19 Jun 2024- KORGAS is 54.6% directly/indirectly owned by the Korean Government (Central Government 26.2%, KEPCO 20.5%, Local Government 7.9%). It is Korea's sole integrated gas utility company with an effective monopoly over the exploration & production (E&P), procurement, storage & production, transmission and wholesale distribution of natural gas. It is crucial to Korea's green transition plan to increase LNG generation by 56% by 2036 from 2022. In addition, KORGAS was licensed as Korea's sole hydrogen distribution agency in 2020.
- KORGAS is one of the largest LNG importer in the world and sells imported natural gas to domestic companies in South Korea. As of YE23, KORGAS operates 77 storage tanks at 5 LNG terminals in Incheon, Pyeong Taek, Tong Yeong, Sam Cheok and Jeju. It has 5,178 km of pipeline network nationwide, and is looking to construction additional 440 km by 2026.
- The Korea natural gas industry is divided into wholesale and retail segments. KORGAS is the only wholesaler in Korea, and the regional city gas companies are in charge of supplying natural gas to retail consumers through regional retail pipelines. KORGAS sold 47% of its gas sales to domestic LNG-fired power generation companies (gencos), including the genco subsidiaries of KEPCO and independent power producers (IPPs), and the remaining 53% to city gas companies and heating companies in FY23.
Risk & Catalysts
AS OF 18 Jun 2024Key risks to KORGAS’ standalone credit profile include: (1) Significant depreciation of the KRW against the $ ; (2) Delayed and/or smaller-than-expected retail tariffs hikes; and (3) higher-than-expected capex and investments related to Korea’s green transition.
However, we do not foresee these risks to materially impair KORGAS’ ability to access funding, credit rating and overall credit profile as we expect KORGAS to remain as the sole integrated gas utility company and continue to receive extremely strong financial support from the Korean government.
Key Metric
AS OF 18 Jun 2024| KRW bn | FY19 | FY20 | FY21 | FY22 | FY23 |
|---|---|---|---|---|---|
| Debt to Book Cap | 76.6% | 75.7% | 75.8% | 81.3% | 80.7% |
| Net Debt to Book Cap | 75.6% | 74.6% | 74.2% | 79.8% | 79.1% |
| Debt/Equity | 327.2% | 312.4% | 313.3% | 434.4% | 418.0% |
| Gross Leverage | 8.2x | 9.4x | 9.1x | 9.9x | 11.6x |
| Net Leverage | 8.1x | 9.3x | 8.9x | 9.7x | 11.4x |
| Interest Coverage | 3.9x | 3.4x | 4.8x | 5.1x | 2.2x |
| EBITDA Margin | 13.0% | 12.3% | 11.4% | 8.8% | 8.0% |
CreditSight View Comment
AS OF 04 Jul 2024We maintain our O/P recommendation KORGAS. We expect KORGAS’ credit profile to improve in 2H24 supported by higher tariffs and normalizing natural gas procurement costs. We expect KORGAS, which is the sole integrated natural gas utility company in South Korea to continue enjoying solid government support. We view its $ bonds as attractive compared to lower rated Chinese SOEs, BBB-rated low beta Korean corporates and other Korean quasi-sovereigns. In particular, we like its newly issued Jul-29 for the high on-market coupon; for investors looking for defensive short-dated carry, we also like its 27s.
Recommendation Reviewed: July 04, 2024
Recommendation Changed: June 27, 2023
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China Construction Bank
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Bangkok Bank
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Fundamental View
AS OF 17 Apr 2024We expect the credit profile of Sinopec, which is one of the three Chinese national oil companies (NOCs) to continue to be underpinned by its strategic role in China’s energy security and the resulting strong government support.
We expect Sinopec’s standalone credit profile to remain supported in FY24 by resilient refined oil demand and improving demand for chemical products as industrial activities pick up and the destocking trend ends.
To note, we use the financials of HKEx listed Sinopec Corp (386.HK) as a proxy for the credit profile of its parent, the obligor of the outstanding $ bonds (BBG: SINOPE).
Business Description
AS OF 17 Apr 2024- Sinopec Group is a Chinese integrated oil and gas (O&G) company and is one of the largest globally & domestically. In FY23, 56.1% of Sinopec Corp' external revenues came from marketing and distribution (i.e. retail and direct sales of refined oil), 13.1% from chemicals, 5.4% from refining, and 5.7% from E&P. Corporate and others segment accounted for the remaining 19.7% of sales revenue, consisting of import and export business, R&D and managerial activities.
- The refining segment purchases crude oil from third parties as well as the E&P segment of the company, and processes crude oil into refined petroleum product. Most of the gasoline, diesel and kerosene are sold internally to the marketing and distribution segment of the company; part of the chemical feedstock is sold internally to the chemical segment, and the other refined petroleum products are sold externally to both domestic and overseas customers. The marketing and distribution segment purchases refined oil products from the refining segment and third parties, and mainly distributes to domestic customers via its wholesale and retail networks.
- In FY23, Sinopec's total oil and gas output was 504 mn barrels of oil equivalent (mmboe), up 3.1% YoY; this included 252/29 mmbbls (+0.3%/-1.9%) of domestically produced/overseas crude oil, as well as 1,338 bcf of natural gas (+7.1% YoY). The average realized price of its crude oil and natural gas was $76.6/bbl and $7.1/thousand cubit feet respectively.
Risk & Catalysts
AS OF 17 Apr 2024Risks: Lower-than-expected domestic sales of refined oil and chemical products due to a severe economic downturn, higher-than-expected crude oil and gas feedstock costs resulted from geopolitical tensions, elevated inventory losses due to tumbling oil & gas prices, and large capex overrun result in a weaker standalone credit profile. However, we expect the strong government support to offset these downside risks. US sanction related headline risks due to US-China tension and other geopolitical risks.
Catalysts: inflow into China $ bonds as a result of improving China macro outlook and US-China relationship; stronger-than-expected recovery in chemical product demand.
Key Metric
AS OF 17 Apr 2024| RMB bn | FY19 | FY20 | FY21 | FY22 | FY23 |
|---|---|---|---|---|---|
| Total Debt/Capitalization | 27.8% | 25.3% | 25.6% | 27.5% | 31.5% |
| Net Debt/Capitalization | 17.3% | 9.4% | 7.6% | 16.3% | 19.8% |
| Total Debt/Total Equity | 38.6% | 33.8% | 34.5% | 38.0% | 46.1% |
| Total Debt/Total Assets | 19.2% | 17.2% | 16.7% | 18.3% | 21.7% |
| Total Debt/EBITDA | 1.6x | 1.5x | 1.2x | 1.5x | 2.0x |
| Net Debt/EBITDA | 1.0x | 0.6x | 0.4x | 0.9x | 1.3x |
| EBITDA/Gross Interest | 12.9x | 16.8x | 20.1x | 16.1x | 14.5x |
| EBITDA Margin | 7.3% | 9.5% | 9.4% | 7.0% | 6.8% |
CreditSight View Comment
AS OF 17 Apr 2024We affirm our Market perform recommendation on Sinopec (A1/A+/A+). A-rated Chinese state-owned enterprises (SOEs), including Sinopec are trading tight due to a lack of new supply and as investors fly to quality amid macro uncertainties in China. We continue to prefer AA-rated Korean quasi-sovereign names for safe carry (like KOROIL, KORGAS, KEPCO) and higher-beta Chinese SOEs for spread pickup.
Recommendation Reviewed: April 17, 2024
Recommendation Changed: May 03, 2021
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China Construction Bank
Bank of China
Bangkok Bank