Petronas’ bond spread remains stable, trading close to fair value – CreditSights

KUALA LUMPUR: Petroliam Nasional Bhd’s (Petronas) bond spread has remained largely stable over the past two years and traded fair to similar-maturity bonds of its peer PT Pertamina, according to debt research firm CreditSights.

Although the spread differential between Petronas’ and Pertamina’s bonds has narrowed recently, the research firm opined that this has rather been caused by the spread tightening in Pertamina’s bonds, while Petronas’ bond spread has traded close to fair value.

“On a relative value basis, the spread differential between Petronas and its peer Pertamina’s bonds has tightened of late.

“Petronas’ 04/30 (G+95 bp) trades 36 bp tighter than Pertamina’s 01/30, and its 04/50 (G+129 bp) trades 55 bp tighter than Pertamina’s 01/50.

“We think the spread differential between the peers should be at least 50 bp for their 2030 bonds, owing to Petronas’ larger scale, significantly stronger credit profile (it maintains a net cash position) and better bond ratings,” said CreditySights in a note on Monday (Dec 5).

“We think the recent narrowing of the spread differential is more a function of the spread tightening in Pertamina’s bonds, while Petronas’ bond spread has remained fairly stable in YTD (year-to-date) 2022 and we believe it is trading close to its fair value,” said the research firm, which kept its “market perform” recommendation on Petronas.

Petronas’ revenue for the cumulative nine months ended Sept 30, 2022 (9MFY2022) surged 58% to RM271.3 billion from RM171.4 billion, mainly driven by higher product prices across all divisions, negating the slight dip in sales volumes.

As a result, the national oil and gas (O&G) company’s earnings before interest, taxes, depreciation and amortisation (Ebitda) more than doubled to RM102.8 billion in 9MFY2022, while Ebitda margin expanded to 38% from 27% in 9MFY2021.

Petronas’ cash balance rose to RM210 billion as of Sept 30, exceeding its gross debt of RM117 billion — indicating ample liquidity and a net cash position. Despite maintaining a net cash position, Petronas is often required to pay dividends to the government, which may pressurise its cash flow, according to CreditSights.

Meanwhile, Petronas’ operating cash flow rose to RM83.1 billion in 9MFY2022 from RM54.4 billion a year earlier on the back of the surge in Ebitda.

“Its 9MFY2022 revenues and Ebitda came in materially stronger year-on-year, aided by much-improved O&G prices. Elevated Brent crude oil prices (currently trading at US$87 [RM381.53] per barrel) are likely to continue to aid net realisation for its high-margin upstream segment, though earnings could moderate down in 4QFY2022 (the fourth quarter ended Dec 31, 2022), as O&G prices have cooled off,” said CreditSights.

Looking ahead, the research firm expects the company’s revenues to remain strong, as the influx of tourists since the reopening of borders in March 2022 should continue to act as a tailwind for transportation fuel demand, which will aid sales volumes for its downstream and gas segments, together contributing a three-fourth of the company’s sales.

“On the other hand, with decelerating global growth/recessionary fears on the horizon, Petronas’ realisation from upstream O&G production may not be as robust as it was in YTD 2022.

“Brent crude prices have moderated in the current 4QFY2022 quarter to an average rate of US$92 per barrel, down 12% versus an average of US$105 per barrel in 9MFY2022. Crude prices remain elevated and should help to continue generating strong operating cash flow for the firm,” it added.

Source : The Edge Markets

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