OREANDA-NEWS. Fitch Ratings has affirmed PT Pertamina (Persero)'s (Pertamina) Long-Term Foreign-Currency IDR at 'BBB-' with a Stable Outlook. Its senior unsecured rating, USD10bn global medium-term note programme and existing senior unsecured notes have also been affirmed at 'BBB-'.

KEY RATING DRIVERS
Equalised with Sovereign: Pertamina's ratings are equalised with those of its parent, the Republic of Indonesia (BBB-/Stable), reflecting strong legal, operating and strategic linkages, in accordance with Fitch's parent and subsidiary linkage methodology. The affirmation reflects Fitch's view that strong state support will continue due to Pertamina's position as one of the most important state-owned entities in executing Indonesia's national energy policy. Pertamina is the country's sole refiner and the dominant retailer of petroleum products. Its standalone credit profile is currently at the same level as its 'BBB-' rating. Pertamina's strong state linkages have helped it maintain adequate liquidity via good access to bank financing and debt markets, and Fitch expects this to continue.

Public Service Obligation: Pertamina performs a government directed public service obligation (PSO) by selling certain refined products at prices set by the state, which are below market prices. Pertamina in turn is compensated through a government subsidy, which ensures it receives a predetermined margin above the international benchmark prices on the products sold under the PSO. These subsidies are important for Pertamina to operate as a profitable entity. Pertamina received subsidies of USD17.8bn in 2014, compared with EBITDA of USD6.1bn.

Reduction in Subsidies: Fitch expects the total subsidy payment to Pertamina to fall substantially to USD3bn-4bn in 2015, following the removal of subsidies on gasoline in January 2015. Most of the diesel and LPG, and all kerosene sold in Indonesia are still retailed at below-market prices. As long as Pertamina continues with the PSO, the subsidy reimbursement would be necessary for the company to operate as a profitable entity. The transition to a market-linked mechanism for gasoline prices has been aided by lower international fuel prices. Fitch estimates that gasoline accounted for more than 40% of the total subsidy Pertamina received in 2014.

Weakening Credit Metrics: Fitch believes that Pertamina's FFO net leverage to could increase by up to 5.5x through to 2017 (3.44x in 2014), due to weak international oil prices and high capex. Pertamina is directly affected by weak oil prices because Pertamina's upstream operations accounted for about 90% of EBITDA in 2014. The majority of its own crude oil output is sold to its refineries and Pertamina's downstream revenues, including the subsidies, broadly vary in line with movements of international fuel prices. Pertamina's credit metrics are likely to gradually improve after 2016, reflecting Fitch expectation of improving oil prices and an increase in Pertamina's upstream production driven by its investments.

Increasing Capex and Investments: Pertamina's capex and investment budget between 2015 to 2019 is about USD35bn, including an allocation of about USD8bn for acquisition of upstream assets. Fitch estimates that Pertamina externally sources over 75% of its refinery crude requirement and over 40% of refined products sold. Increasing Pertamina's upstream production and refinery capacity remains important to improving the company's profitability and containing the state's potential subsidy expenses.

Standalone Profile: Pertamina's standalone credit strength reflects its vertically integrated operations, large scale and dominant position in Indonesia's retail fuel market. However, its operating strengths are moderated by its short upstream production position, mid-stream capacity relative to its overall petroleum product sales, and deterioration in its credit metrics. Pertamina is one of Indonesia's largest producers of crude oil, accounting for over 20% of the country's crude output. Overall, Fitch considers Pertamina's standalone credit profile to be a weak 'BBB'.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Oil prices average USD55/bbl in 2015, USD65/bbl in 2016, and USD75/bbl in 2017 and in the long term in line with the Fitch oil and gas price deck
- Present subsidy formula for diesel, kerosene and LPG to continue
- Downstream volume growth of 4% a year
- Upstream oil and gas volume growth of 10% to 12% in 2015 and 2016 (11% in 2014)
- Cumulative capex and acquisition spend of USD17.5bn between 2015 and 2017

RATING SENSITIVITIES
The issuer's rating is currently equalised with that of Indonesia.

Positive: Future developments that may individually or collectively lead to a positive rating action include:
- Positive rating action on Indonesia's sovereign rating, provided there is no weakening of the company's legal, operational and strategic ties with the government

Negative: Future developments that may individually or collectively lead to a negative rating action include:
- Negative rating action on the sovereign, provided the company's standalone profile also weakens. Fitch would lower the company's standalone profile if capex and M&A leads to a sustained increase of its leverage above 4.0x
- Weakening of links with the state, although Fitch considers this to be unlikely in the medium term.

For the sovereign rating of Indonesia, the following sensitivities were outlined by Fitch in its
Rating Action Commentary of 13 November 2014:

The main factors that could, individually or collectively, lead to positive rating action, are:
- A strengthening of the external balances, making Indonesia less vulnerable to sudden changes in foreign investor sentiment, for instance through lower commodity export dependence or higher foreign direct investment inflows.
- Implementation of structural reforms or improvements in infrastructure that would allow for higher sustainable GDP growth.

The main factors that could, individually or collectively, lead to negative rating action, are:
- A sharp and sustained external shock to foreign and/or domestic investors' confidence with the potential to cause external financing difficulties, for example, as a result of an undue change in the authorities' current cautious monetary policy strategy.
- A rise in the public debt burden caused by discontinuation of adherence to the fiscal policy rule.