OREANDA-NEWS. PT Pertamina (Persero)'s (Pertamina, BBB-/Stable) better-than-expected 1H16 earnings, especially in its downstream operations, have led to a significant strengthening of the company's credit metrics at end-June 2016, Fitch Ratings says. We expect the Indonesian national oil company's downstream margins to narrow in 2H16, although its credit metrics will remain stronger than our previous expectations for the full-year 2016.

In the first six months of 2016, Pertamina's EBITDA margin improved strongly to 23.1% from 10.8% a year earlier and 13% in fully-year 2015. This was mainly driven by its downstream operations, which accounted for over 60% of 1H16 EBITDA, compared with around 22% in 1H15 and around 40% during full-year 2015. EBITDA rose nearly 70% from a year earlier to around USD4bn in 1H16.

However, we expect Pertamina's downstream profitability to shrink during 2H16 as we believe government-directed changes to retail prices may not fully reflect the recent increases in global crude oil prices, especially given the company's strong downstream margins so far in 2016. The Indonesian government has not revised prices of oil products since April 2016. Retail fuel prices are a sensitive issue in Indonesia, which has a history of social unrest in response to fuel price increases.

The company's oil and gas production increased in 2016, which is broadly within our expectations. Oil production was up 12% and gas up by 22% from 1H15. This, along with the strong profitability, has helped the company with strong cash generation. Consequently, Pertamina reduced its gross indebtedness by USD2.2bn and net debt by USD4.2bn from December 2015 levels. Pertamina's capex in 1H16 was only around USD750m and we expect capex to accelerate in the second half, so we are maintaining our full-year capex and investment estimate at around USD4bn.

Fitch expects Pertamina's EBITDA to remain around USD5.5bn-6.0bn during 2016, which despite the large investment, will still lead to strong credit metrics for the year. Fitch expects FFO-adjusted net leverage to be around 2x - similar to 2015 levels but better than our earlier expectations of net leverage weakening to around 4x during 2016. Pertamina's cash generation and its credit metrics are, however, highly susceptible to government policy on retail fuel prices.