Research Update: Petroliam Nasional Bhd. Ratings Affirmed; Proposed Notes Assigned 'A-' Rating

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1 July 28, 2009 Research Update: Petroliam Nasional Bhd. Ratings Affirmed; Proposed Notes Assigned 'A-' Rating Primary Credit Analyst: Andrew Wong, Singapore (65) Secondary Credit Analyst: Manuel Guerena, Singapore (65) Table Of Contents Overview Rating Action Rationale Outlook Related Research Ratings List 1 Standard & Poor's. All rights reserved. No reprint or dissemination without S&P's permission. See Terms of Use/Disclaimer on the last page

2 Research Update: Petroliam Nasional Bhd. Ratings Affirmed; Proposed Notes Assigned 'A-' Rating Overview PETRONAS has a critical role and integral link with the government. PETRONAS' final rating is below its stand-alone credit profile as it is sensitive to sovereign intervention. We affirmed the corporate credit ratings on PETRONAS and the rating on its senior unsecured bonds and guaranteed notes. We have assigned our 'A-' rating on the proposed issues of senior guaranteed notes and trust certificates. The stable outlook is consistent with that on the sovereign ratings. Rating Action On July 28, 2009, Standard & Poor's Ratings Services affirmed its long-term corporate credit ratings (foreign currency A-/Stable/--; local currency A+/Stable/--) on Petroliam Nasional Bhd. (PETRONAS). The outlook is stable. At the same time, we also affirmed the issue ratings on the senior unsecured bonds issued by PETRONAS and guaranteed notes issued by PETRONAS Capital Ltd. and guaranteed by PETRONAS. Standard & Poor's also assigned its 'A-' rating on the proposed senior guaranteed notes to be issued by PETRONAS Capital Ltd. and the trust certificates to be issued by PETRONAS Global Sukuk Ltd. Rationale The notes are irrevocably and unconditionally guaranteed by PETRONAS and rank pari passu with the existing unsecured obligations. PETRONAS is the sole obligor on the periodic distributions under the trust certificates and also the sole obligor on the redemption amount at maturity under the purchase undertaking. The proceeds from the guaranteed notes and trust certificates will be used for funding capital expenditure. The rating on the notes and certificates is subject to finalization of documentation, confirmation of amounts and terms, and a satisfactory review of the legal opinions. The rating on PETRONAS reflects the company's critical role and integral link with the government. We assess the stand-alone credit profile of PETRONAS to be 'AA-'. However, it remains sensitive to government intervention. Therefore, the long-term ratings on the company are equalized with the sovereign credit rating on Malaysia (foreign currency A-/Stable/A-2; local currency A+/Stable/A-1). In accordance with our criteria for rating government-related entities (GREs), we view an almost certain likelihood of extraordinary government support based on our assessment of these PETRONAS characteristics: Standard & Poor s RatingsDirect July 28,

3 Research Update: Petroliam Nasional Bhd. Ratings Affirmed; Proposed Notes Assigned 'A-' Rating Critical role as the main contributor to government revenues. It assists the government in meeting key economic, social, and political objectives by tapping Malaysia's hydrocarbon reserves, which are PETRONAS owned, to generate revenue for the government. It also provides subsidized gas to the power and industrial sectors. We believe a default by PETRONAS would have a critical impact on the government. Integral link with its sole owner, the Malaysian government. Although PETRONAS is wholly owned by the Ministry of Finance, it reports directly to the Prime Minister. We view its control over Malaysia's hydrocarbon basins as reason for strong ongoing government support and expect integration with the government to remain for the foreseeable future. We also expect the government to continue to make higher use of the company's financial resources for policy objectives, given the government's fiscal stimulus measures and the recent contraction in economic growth. The stand-alone credit profile reflects, in our opinion, the strong business risk profile through the company's exclusive ownership and control over Malaysia's large hydrocarbon resources which, together with its low-cost integrated operations, results in a minimal financial risk profile. These strengths, however, are partly offset by PETRONAS' high capital expenditure requirements, its continued provision of subsidized gas to the power and industrial sectors, and the above-average industry risks. Capital expenditures are high due to the maturing profile of its domestic assets and the need to invest to arrest declining domestic production as well as further develop its overseas assets, which have strong growth potential. Given its significant investment requirements and weaker energy demand, we expect PETRONAS' financial risk profile to weaken. Nevertheless, the company's strong balance sheet and low-cost operations should provide adequate cushion for the current rating. Liquidity In our view, PETRONAS' liquidity is very strong. It had unrestricted cash of Malaysian ringgit (MYR) 89.9 billion, compared with short-term debt of MYR8.4 billion at March 31, Short-term debt included EUR750 million in guaranteed notes, repaid in May The company's liquidity is further boosted by additional short-term investments of MYR40.3 billion, 80% of which are held in government securities. PETRONAS' access to cash and its ability to liquidate short-term investments are subject to the health of the domestic banking system and capital markets. About 77% of the company's cash holdings and investments are denominated in ringgit. PETRONAS' debt and derivative agreements have no rating triggers or financial covenants. Outlook The stable outlook is consistent with that on the sovereign ratings. Although PETRONAS' stand-alone credit profile is better than the sovereign's, we believe it remains sensitive to government intervention. The outlook also 3

4 Research Update: Petroliam Nasional Bhd. Ratings Affirmed; Proposed Notes Assigned 'A-' Rating reflects our expectations that PETRONAS' financial condition should remain sound, based on the company continuing to adhere to conservative funding practices in expanding its business, and that large investments are not accelerated outside its core businesses to the detriment of its liquidity and capital structure. The ratings are highly influenced by the sovereign ratings on Malaysia, in view of the integral link with the government and the company's critical role in managing the country's oil and gas infrastructure and implementing the national energy policy. Hence, the ratings on PETRONAS could be raised if the sovereign rating is raised. Conversely, the ratings may be lowered if any of the following occurs: The sovereign rating is lowered. The nature of the relationship with the sovereign changes materially. PETRONAS' financial risk profile and liquidity deteriorate significantly. Related Research This article is based in part on the following criteria articles: "Corporate Ratings Criteria 2008," published on RatingsDirect on April 15, "Rating Government-Related Entities: A Primer," published on RatingsDirect on June 14, "Enhanced Methodology And Assumptions For Rating Government-Related Entities," published on RatingsDirect on June 29, "Principles Of Corporate And Government Ratings," published on RatingsDirect on June 26, "Sovereign Credit Ratings: A Primer," published on RatingsDirect on May 29, Ratings List New Rating PETRONAS Global Sukuk Ltd Petronas Capital Ltd. Ratings Affirmed Petroliam Nasional Bhd. Corporate Credit Rating Foreign Currency Local Currency ASEAN Regional Scale A-/Stable/-- A+/Stable/-- axaaa/--/-- Petroliam Nasional Bhd. Standard & Poor s RatingsDirect July 28,

5 Research Update: Petroliam Nasional Bhd. Ratings Affirmed; Proposed Notes Assigned 'A-' Rating Petronas Capital Ltd. Complete ratings information is available to RatingsDirect subscribers at All ratings affected by this rating action can be found on Standard & Poor's public Web site at select your preferred country or region, then Ratings in the left navigation bar, followed by Find a Rating. 5

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