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Petronas' U.S. Dollar Global Bond Issuance 1999 Rated 'BBB-' by DCR

HONG KONG, July 27 /PRNewswire/ -- Duff & Phelps Credit Rating Co. (DCR) has assigned a 'BBB-' (Triple-B-Minus) long-term foreign currency rating to Petroliam Nasional Berhad (Petronas)'s U.S. dollar global bond issuance 1999. The rating reflects Petronas' solid financial profile, integrated oil and gas operations, the entire ownership and control of Malaysia's oil and gas reserves which are vested in the company, limited exploration and development risks due to the nature of production sharing contracts, and strong business position in the domestic market.

Constraining factors for the rating include: Petronas' heavy capital expenditure program in the next three years to further develop petrochemical business; natural gas development; and international operation activities; and the inherent risk of Malaysian banking system, where Petronas places most of its surplus funds. DCR also notes that
considering its role in the Malaysian economy and 100% ownership by the state, Petronas' investment decisions may be guided by national policy objectives to support government-backed initiatives. Despite Petronas' ambitious capital expenditure program, DCR does not expect any short term pressure on the company's cashflow.

The rating on Petronas also reflects Malaysia's long-term foreign currency sovereign rating, which is 'BBB-' (Triple-B-Minus). Malaysia's investment-grade status reflects its modest external debt burden and strong international liquidity position. A diversified export base and the high participation of multinational companies in the economy should facilitate economic recovery in Malaysia. Malaysia's rating remains constrained by financial sector problems -- asset quality pressures in the financial sector have increased dramatically since 1997 as a result of the economic recession. DCR recognizes the efforts of the government to set up the institutional framework to deal with non-performing loans and the recapitalization of financial institutions. Yet concerns remain regarding the ultimate cost of the financial sector cleanup (which could peak at more than 15 percent of GDP). Uncertainty regarding the future course of Malaysia's economic policies also continues to constrain the rating.

Petronas' capital expenditures are forecast to remain high for the next three years, (i.e. Malaysian ringgit (MYR) 14.3 billion in 2000, MYR 9.7 billion in 2001, MYR 7.4 billion in 2002), but will start to gradually decline after March 2002. The amounts of capital expenditures will be equally spent to the company's upstream and downstream business activities. In the upstream business, the capital expenditures will be used to finance the natural gas developments in Malaysia (50 percent) as well as oil
development and production activities in overseas countries (50 percent). The capital expenditures in the downstream business will be mainly for the developments of petrochemical projects and construction of two new liquefied natural gas (LNG) tankers and Malaysia LNG Tiga (Petronas' third LNG plant). Petronas expects to internally finance approximately 50-60 percent of the capital expenditures by cashflow from operations.

Given the long-term nature of its debt and substantial cash reserves, Petronas' balance sheet should remain strong despite additional borrowings needed for the capital expenditure program. The company's total debt divided by total capital is expected to be approximately 50 percent, while minimum EBITDA divided by gross interest expense of 6-7 times should be attainable. In addition, the company's profit margin is also expected to improve in line with higher crude oil prices for this year.

Founded in 1974 to develop petroleum resources in Malaysia, Petronas is a 100 percent state-owned oil and gas company with integrated operations that cover oil/gas exploration and production; oil refining; marketing, trading, and distribution of crude oil and refined petroleum products; processing and distribution of natural gas; production and marketing of LNG; and manufacturing and marketing of petrochemical as well as shipping business to support its crude oil trading and LNG operations.

SOURCE: Duff & Phelps Credit Rating Co.