(The following statement was released by the rating agency) SYDNEY, February 25 (Fitch) Fitch Ratings has affirmed Malaysia-based Petroliam Nasional Berhad’s (PETRONAS) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at ‘A’, and its Short-Term Foreign-Currency IDR at ‘F1′. The Outlook on the Long-Term IDRs remains Stable. At the same time, Fitch has affirmed PETRONAS’ foreign currency senior unsecured rating at ‘A’, including debt issued by PETRONAS Capital Limited and guaranteed by PETRONAS. KEY RATING DRIVERS Ratings Constrained by Sovereign: PETRONAS’ Foreign- and Local-Currency IDRs are constrained by Malaysia’s Country Ceiling and Local-Currency IDR, respectively. PETRONAS is 100%-owned by Malaysia and the government can exert significant influence over its operating and financial policies. Foreign-Currency IDR at Country Ceiling: Fitch believes that PETRONAS’ importance in generating foreign currency for Malaysia warrants a foreign-currency rating at Malaysia’s Country Ceiling of ‘A’ which is higher than Malaysia’s Foreign Currency IDR of ‘A-‘. PETRONAS’ Foreign-Currency IDR will continue to be rated at Malaysia’s Country Ceiling provided the company continues to maintain its strong standalone financial profile, without material deterioration, after satisfying its financial commitments to the state. Malaysia has helped PETRONAS by reducing its expected dividends in the current low oil price environment which meaningfully benefits the company’s expected financial profile. Standalone Profile, Lower Headroom: Despite weakened oil and gas prices, PETRONAS continues to maintain a strong standalone credit profile assessed by Fitch at ‘AA-‘. The rating headroom for its standalone profile has, however, weakened due to pressure on operating cash generation from sustained low oil prices, and expected slow recovery of prices over the forecast period, despite the aforesaid reduction in dividends. Its rating also benefits from material capex and opex savings announced by the company totalling MYR50bn through 2020. Lower Dividend Supports Rating: Fitch expects lower dividend payment of MYR16bn in 2016, down from MYR26bn in 2015 and MYR29bn in 2014. With this reduction in dividends, Fitch expects PETRONAS’ to have the ability to meet a majority of its capex from internal cash generation notwithstanding the weaker operating cash generation from low commodities prices. However, in Fitch’s view, PETRONAS will continue to make sizeable contributions to the government’s revenue. Any sustained reduction in its dividend payments remains predicated on the government’s policy and its financial requirements given the government’s reliance on PETRONAS for state revenues. Significant Medium-Term Capex: In January 2016, PETRONAS announced spending cuts of MYR50bn over the next four years. Fitch, however, expects PETRONAS’ capex programme to remain significant, including material capex on the liquefaction/production facilities associated with its Canadian joint venture, Pacific NorthWest LNG project and the downstream Refinery and Petrochemical Integrated Development (RAPID) project in Malaysia. A conditional final investment decision on the Pacific NorthWest LNG project was made on 11 June 2015, which is still pending the receipt of final environmental approval. Its funding needs associated with this venture depend on any further reduction in PETRONAS’ stake in the project, which currently stands at 62%. It is unclear if PETRONAS will be able to involve additional equity partners for this project given the weaknesses in oil and gas prices. The sponsors may, however, reassess the feasibility and timing of this project given the significant weakening in oil and gas prices. The USD16bn RAPID project consists of a refinery, naphtha cracker plant and other petrochemical facilities; the commissioning of the refinery is expected in early 2019 and associated petrochemical plants to be done in a phased manner. Other facilities associated with the RAPID project, covering electrical and water supplies, LNG import terminal and a regasification terminal, will require an additional capex of USD11bn. Near-Term Negative Free Cash Flows: Fitch expects PETRONAS’ free cash flows to remain weak, reflecting the expected slow recovery of oil prices, high committed capex and dividends payments. PETRONAS’ financial flexibility, however, remains strong benefitting from lower dividend payment in 2015 and 2016 as well as low funding costs achieved in its USD5bn bond issuance in March 2015. The company also had material cash balances of MYR125bn at 30 September 2015, and was in a net cash position given its relatively low indebtedness of MYR63bn. Its leverage, as measured by funds from operations (FFO)-adjusted net leverage, was negative at 0.7x (a net cash position), and its FFO interest coverage was at 49x for 2014. KEY ASSUMPTIONS – Oil price based on Fitch’s Brent price deck of USD33/barrel (bbl) in 2016, USD45/bbl in 2017 and USD55/bbl in 2018 – Dividend payment of MYR26bn in 2015 and MYR16bn in 2016 – Capex of MYR60bn in 2015 and then average MYR50bn in 2016 to 2018 RATING SENSITIVITIES Positive: Future developments that may, individually or collectively, lead to positive rating action include: – Upgrade of Malaysia’s Foreign- and Local-Currency IDRs and its Country Ceiling. Negative: Future developments that may, individually or collectively, lead to negative rating action include: – Downgrade of Malaysia’s Local-Currency IDR and its Country Ceiling. – Government’s policies and financial requirements on the company, leading to a sustained deterioration of PETRONAS’ currently very strong standalone credit profile will result in the company’s Long-Term Foreign-Currency IDR being downgraded to the same level as the Foreign-Currency IDR of Malaysia. For the sovereign rating of Malaysia, the following sensitivities were outlined by Fitch in its Rating Action Commentary of 23 February 2016: The Stable Outlooks reflect Fitch’s assessment that upside and downside risks to the ratings are current broadly balanced. The main factors that could, individually or collectively, lead to a negative rating action are: – A sustained deterioration in fiscal discipline and the public finances leading to a sharper rise in government debt ratios than Fitch currently expects – Further weakening of the balance of payments that strains domestic economic and/or financial stability – Deterioration in political stability or governance that lead to a weakening of credibility of policy-making institutions The main factors that could, individually or collectively, lead to a positive rating action are: – Sustained reductions in government debt ratios – Narrowing of structural weaknesses relative to peers, including development indicators and governance LIQUIDITY: PETRONAS’ liquidity remains strong, as reflected in net cash balances against balance sheet debt as at 30 September 2015. Contact: Primary Analyst Sajal Kishore Director +612 8256 0321 Fitch Australia Pty Ltd., Level 15, 77 King Street, Sydney NSW 2000 Secondary Analyst Isabelle Katsumata Director +65 6796 7226 Committee Chairperson Buddhika Piyasena Senior Director +65 6796 7223 Media Relations: Leni Vu, Sydney, Tel: +61 2 8256 0304, Email: [email protected]. Additional information is available on www.fitchratings.com. Applicable Criteria Corporate Rating Methodology – Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015) https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362 Country Ceilings (pub. 20 Aug 2015) https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869287 Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr _id=999984 Solicitation Status https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=999984 Endorsement Policy https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&det ail=31 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. 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