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Sub-sector: Oil and Gas
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Fundamental View
AS OF 12 May 2023Pertamina 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 pressure its free cash flow generation.
Dampened upstream O&G EBITDA margins from moderating crude oil prices could outweigh improved downstream O&G margins, given the upstream business accounts for over 80% of Pertamina’s total EBITDA.
Business Description
AS OF 12 May 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 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 ~967,000 boe per day in FY22. 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 12 May 2023Pertamina’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 and FY22. Additionally, since retail prices of certain fuel products are regulated, realized prices may be below its cost of sales.
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.
Key Metrics
AS OF 12 May 2023| $ mn | FY18 | FY19 | FY20 | FY21 | FY22 |
|---|---|---|---|---|---|
| Debt to Book Cap | 40.0% | 36.2% | 38.5% | 41.2% | 42.1% |
| Net Debt to Book Cap | 21.5% | 22.4% | 18.9% | 21.9% | 12.5% |
| Debt/Total Equity | 66.6% | 56.8% | 62.5% | 70.0% | 72.7% |
| Debt/Total Assets | 30.5% | 26.4% | 28.3% | 29.9% | 30.8% |
| Gross Leverage | 2.1x | 2.2x | 2.4x | 2.5x | 1.9x |
| Net Leverage | 1.2x | 1.3x | 1.2x | 1.3x | 0.6x |
| Interest Coverage | 10.3x | 8.1x | 7.8x | 8.7x | 11.2x |
| EBITDA Margin | 15.9% | 14.9% | 19.9% | 16.0% | 16.7% |
CreditSights View
AS OF 16 May 2023We upgrade Pertamina to Market perform from Underperform. We think Pertamina should trade 30 bp tighter than Indonesian SOE PLN as Pertamina’s lower net leverage and less material ESG concerns (PLN is still largely a thermal coal power producer) outweigh a weaker FY23 upstream oil price outlook. As the spread differential has narrowed to 27-42 bp tighter (from 60-87 bp tighter on 9 Dec 2022 when we downgraded Pertamina), we think valuations are now fair. We remain comfortable with Pertamina’s credit profile aided by its strong government backing. While cooling Brent crude prices could dampen upstream margins, we think its solid credit metrics (FY22: 1.9x/0.6x) provide elbowroom for modest deterioration. Capex typically remains elevated and in excess of its operating cash flow generation.
Recommendation Reviewed: May 16, 2023
Recommendation Changed: May 16, 2023
Who We Recommend
Bank Rakyat Indonesia
Mitsubishi UFJ Financial Group
State Bank of India
How may we help you?
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 11 May 2023While Petron’s credit metrics remain elevated, we see a stable FY23 credit outlook owing to moderating crude oil prices and resilient fuel demand aided by the company’s dominant market share in 2 markets.
Petron is fairly insulated against high crude oil input costs as about two-third of its total revenues are indexed to Dubai crude prices, which allows for cost pass-throughs in Philippines.
Liquidity remains tight, though we expect its stable fundamentals and strong SMC group reputation to facilitate debt rollover and refinancing.
We see low non-call risk for Petron’s $478 mn c.Jul-2023 perp given its punitive 250 bp coupon step-up, its desire to avoid reputational risk and contagion risk to other SMC perps, and that it can be covered by its unrestricted cash balance or be refinanced.
Business Description
AS OF 11 May 2023- 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 11 May 2023Petron holds 55 days of inventory, which is on the high side relative to industry standards. This exposes the company to inventory losses attributable to potential short-term swings in crude oil prices.
Prices of fuel products are adjusted on a weekly basis in the Philippines, according to international crude oil prices.
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 Metrics
AS OF 11 May 2023| PHP bn | FY20 | FY21 | FY22 | 1Q22 | 1Q23 |
|---|---|---|---|---|---|
| Debt to Book Cap | 74.3% | 72.3% | 74.0% | 71.9% | 72.7% |
| Net Debt to Book Cap | 66.3% | 63.3% | 65.5% | 63.5% | 65.2% |
| Debt/Total Equity | 289.4% | 261.6% | 284.2% | 256.0% | 266.4% |
| Debt/Total Assets | 71.3% | 71.2% | 70.2% | 70.0% | 68.1% |
| Gross Leverage | 65.4x | 11.2x | 10.9x | 9.3x | 10.2x |
| Net Leverage | 58.3x | 9.8x | 9.7x | 8.2x | 9.1x |
| Interest Coverage | 0.3x | 2.5x | 2.2x | 3.0x | 1.9x |
| EBITDA Margin | 1.3% | 5.9% | 3.4% | 6.4% | 5.8% |
CreditSights View
AS OF 11 May 2023 We maintain our Market perform recommendation on Petron. Its c.Apr-2026 perp trades 15 bp wider than SMC GP c.Jan-2026 perp, that rightly reflects its slightly longer tenor. We think Petron is fundamentally stronger than SMC GP, as it enjoys cost pass-through mechanism, has modestly better leverage metrics and has manageable perps turning callable. We think it is SMC GP that has room to widen. Overall, we see a stable credit outlook for Petron amid resilient fuel demand and lower crude oil prices, and its cost pass-through mechanism in Philippines. Its leverage metrics remain elevated, negated partly by its relatively low capex. We see low non-call risk for its $478 mn c.Jul-2023 perp given Petron’s ability to tap its cash balance, refinance, and its desire to avoid reputational risk.
Recommendation Reviewed: May 11, 2023
Recommendation Changed: January 26, 2022
Who We Recommend
Bank Rakyat Indonesia
Mitsubishi UFJ Financial Group
State Bank of India
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Fundamental View
AS OF 21 Apr 2023We maintain our Market perform recommendation on Sinopec. Sinopec Group holds a 68%-stake in Sinopec Corp, which contributed ~98% of the group’s total revenue in FY21. Hence, we use Sinopec Corp as a key proxy for the group.
Sinopec Corp’s cash flow generation weakened and leverage edged higher albeit still moderate in FY22, as EBITDA margins declined. We expect Sinopec Corp to generate stronger EBITDA and FCF in FY23, and improve its debt metrics.
We think Sinopec is not cheap following its COVID reopening triggered China credit rally in mid-November. That said, we expect high-grade and stable SOE credits, like Sinopec, to remain supported and perform in line with the ADIG Index against the backdrop of a still fragile global risk sentiment post the banking sector turmoil.
Business Description
AS OF 21 Apr 2023- Sinopec Group is a Chinese integrated oil and gas (O&G) company and is one of the largest globally & domestically, measured in terms of volume, refined product sales and number of service stations. We use Sinopec Corp as a proxy for Sinopec Group as it contributed to ~98% of its FY21 revenue. In terms of Sinopec Corp's segmental breakdown, refining and marketing contributed 57% of total revenue from external sales, chemicals represented 14%, and E&P contributed 6% in FY22.
- The group has historically relied on O&G imports as the main feedstock into its core refining business. Depending on the prices of their feedstock and product mix, this can arise in differing profitability and refining margins for the group. Sinopec Group's refining processes and marketing network are more essential to smooth its profitability and refining margins. The group also engages in some commodity hedging to mitigate extreme feedstock price fluctuations.
- As of FY22, Sinopec Corp held a total of 1,961 mn bbl and 8,806 bcf of crude and natural gas reserves. Sinopec process 242 mn tonnes of crude and produced 140 mn tonnes of refined oil products in FY22. It also has 9 hydrogen supply centers as of YE22. On the retail side, Sinopec Corp had 30,808 service stations under its brand as of YE22.
- Sinopec Corp is currently listed in the Hong Kong and Shanghai Stock Exchange. As at 21 April 2023, Sinopec Corp's market capitalization stood at RMB 705.6 bn.
Risk & Catalysts
AS OF 21 Apr 2023Vulnerability to global and domestic oil and gas (O&G) prices is exacerbated by the company’s heavier reliance on imported oil for refining. This exposes the company to higher exogenous factors/geopolitical risks where it imported ~86% of its crude oil used for refining and 45-50% of its liquefied natural gas (LNG).
Policy risk from strict regulations over domestic O&G prices, exploration licensing, and import and export quotas could materially impact all three key business streams in Sinopec’s integrated business model.
The company’s strong reliance on the sales of crude oil may result in a weak ESG score as the environmentally damaging and high carbon intensity nature of the business conflicts with multiple ESG mandates. This potentially subjects Sinopec to elevated energy transition risk. Sinopec has taken various measures to mitigate this by expanding into renewable energy sources (ie. Wind, Solar and Biomass), implementing low-carbon production and operations (via decarbonizing technologies such as Carbon Capture, Utilisation and Storage (CCUS)) and ramping up on its hydrogen segment, where it aims to be the largest hydrogen company in China.
Key Metrics
AS OF 21 Apr 2023| RMB bn | FY22 | FY21 | FY20 | FY19 | FY18 |
|---|---|---|---|---|---|
| Total Debt/Capitalization | 27.6% | 25.6% | 25.3% | 27.8% | 16.4% |
| Net Debt/Capitalization | 16.4% | 7.6% | 9.4% | 17.3% | 0.1% |
| Total Debt/Total Equity | 38.1% | 34.5% | 33.8% | 38.6% | 19.6% |
| Total Debt/Total Assets | 18.3% | 16.7% | 17.2% | 19.2% | 10.6% |
| Total Debt/EBITDA | 1.5x | 1.2x | 1.5x | 1.6x | 0.7x |
| Net Debt/EBITDA | 0.9x | 0.4x | 0.6x | 1.0x | 0.0x |
| EBITDA/Gross Interest | 16.1x | 20.1x | 16.8x | 12.9x | 35.7x |
| EBITDA Margin | 7.0% | 9.4% | 9.5% | 7.3% | 7.9% |
CreditSights View
AS OF 28 Mar 2023We maintain our Market perform recommendation on Sinopec. Sinopec Group holds a 68%-stake in Sinopec Corp, which contributed ~98% of the group’s total revenue in FY21. Hence, we use Sinopec Corp as a key proxy for the group. Sinopec Corp’s cash flow generation weakened and leverage edged higher albeit still moderate in FY22, as EBITDA margins declined. We expect Sinopec Corp to generate stronger EBITDA and FCF in FY23, and improve its debt metrics. We think Sinopec is not cheap following its COVID reopening triggered China credit rally in mid-November. That said, we expect high-grade and stable SOE credits, like Sinopec, to remain supported and perform in line with the ADIG Index against the backdrop of a still fragile global risk sentiment post the banking sector turmoil.
Recommendation Reviewed: March 28, 2023
Recommendation Changed: May 03, 2021
Who We Recommend
Bank Rakyat Indonesia
Mitsubishi UFJ Financial Group
State Bank of India
How may we help you?
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Fundamental View
AS OF 18 Apr 2023We expect CNOOC’s revenue growth to decelerate in FY23 as crude and natural gas prices have started to ease in 4Q22. That said, we expect CNOOC to maintain its cost leadership and a stable EBITDA margin.
We believe CNOOC is well positioned in terms of cost management, and we expect the company to continue to post strong operating profits in FY23 against the still elevated oil and gas prices.
We expect CNOOC to continue to benefit from the implied government support due the company’s critical role in China’s offshore upstream value chain and safeguarding China’s energy security.
Business Description
AS OF 18 Apr 2023- CNOOC is an upstream oil and gas (O&G) company, and is one of the three Chinese national oil companies (NOCs). Globally, it is also among one of the largest exploration and production (E&P) firms in terms of assets/reserves and production. CNOOC engages in E&P independently or through production sharing contacts (PSCs) with foreign/domestic partners. CNOOC is also the largest liquefied natural gas (LNG) importer in China, where it accounted for ~44% of total domestic imports.
- As of 31 December 2022, 69% of CNOOC's revenue is derived from customers in China. Globally, CNOOC has exposure toIraq, Russia, Canada, the United States of America, the United Kingdom, Nigeria, Uganda, Argentina, Brazil, Guyana and Australia. On foreign exchange risk, CNOOC is primarily exposed to the $ and RMB currencies.
- CNOOC produced 623.9 mmboe of O&G output in FY22. The company had a net proved reserves of about 6.24 bn BOE, of which, around 49.9% of its net proved reserves are currently undeveloped.
Risk & Catalysts
AS OF 18 Apr 2023Vulnerability and exposure to global/domestic oil benchmark, which may fluctuate in response to changes in supply and demand, market uncertainty and other exogenous factors beyond the company’s control.
CNOOC’s business is capital intensive as it has to regularly incur capex spending on acquisitions/JVs, exploration and production, and oilfield development to maintain its proved O&G reserve in offshore China.
Policy risk from strict regulations over O&G prices, E&P licensing, and import/export quotas. CNOOC is also exposed to geopolitical risk and it is included in the US DoD military and US Entity blacklists. The spillover risk of Russian sanctions and potential US secondary sanctions could affect its business operations.
CNOOC’s high reliance on crude oil sales may result in elevated energy transition risk and conflict with ESG mandates for its carbon-intensive nature.
Key Metrics
AS OF 21 Apr 2023| RMB bn | FY18 | FY19 | FY20 | FY21 | FY22 |
|---|---|---|---|---|---|
| Debt to Book Cap | 25.3% | 26.1% | 24.9% | 21.9% | 18.3% |
| Net Debt/Capitalization | 23.2% | 17.8% | 13.5% | 9.0% | 1.8% |
| Debt to Equity | 33.9% | 35.4% | 33.1% | 28.1% | 22.5% |
| Total Debt/Total Assets | 20.8% | 20.9% | 19.9% | 17.2% | 14.5% |
| Total Debt/EBITDA | 1.1x | 1.1x | 1.5x | 0.8x | 0.5x |
| Net Debt/EBITDA | 1.0x | 0.7x | 0.8x | 0.3x | 0.0x |
| EBITDA/Gross Interest | 23.8x | 24.3x | 15.9x | 31.1x | 51.1x |
| EBITDA Margin | 56.8% | 63.7% | 61.8% | 66.7% | 61.9% |
CreditSights View
AS OF 18 Apr 2023We affirm our Market perform recommendation on CNOOC (A1/A+/A+; Market perform) with a preference for the short-end (<5Y to maturity). Similar to other NOC (Chinese national oil) credits such as Sinopec (A1/A+/A+; Market perform) and CNPC (A1/A+/NR; Market perform), we think that CNOOC $ bonds are not cheap after tightening by an average of 34 bp since the COVID reopening triggered a China credit rally in mid-November. We continue to prefer short-end (<5Y to maturity) CNOOC $ bonds given its relatively flat spread/yield curve. CNOOC's belly (5-10Y maturity) is on average 44 bp wider than the short-end, a smaller yield pick-up compared to China A-rated peers (58 bp) and Asia A-rated peers (48 bp).Â
Recommendation Reviewed: April 18, 2023
Recommendation Changed: May 03, 2021
Who We Recommend
Bank Rakyat Indonesia
Mitsubishi UFJ Financial Group
State Bank of India