Bangkok--28 Apr--Fitch Ratings
Fitch Ratings (Thailand) Limited has affirmed Thai Oil Public Company Limited's (TOP) National Long-Term Rating at 'AA-(tha)', National Short-Term Rating at 'F1+(tha)', and the National Long-Term Rating on its senior unsecured debts at 'AA-(tha). The Outlook is Stable.
The affirmation reflects its continued strong business profile in the Thai refinery and petrochemical markets. Its financial profile has improved following strong operating performance, which provides increased financial headroom under its current rating guidelines.
KEY RATING DRIVERS
Strong Balance Sheet: TOP's financial leverage, measured by FFO-adjusted net leverage, continued to improve to 0.6x in 2016 (2015: 1.0x), driven by stronger-than-expected operating cash flows. Fitch expects its FFO-adjusted net leverage to stay at about 0.7x-1.0x in 2017-2018, as the agency expects TOP's operating cash flows to soften and capex to be moderate. This provides headroom to weather any drop in refining margin and to make additional investments.
High Uncommitted Capex: Fitch expects TOP's capex to be moderate in 2017-2018. Nevertheless, TOP is presently considering a large project called the Clean Fuels Project, which will focus on increasing capacity and enhancing upgrading units. The project is likely to require large capex and the company plans to make a final investment decision on this project by 1Q18. Fitch will treat a commitment to any significant debt-funded capex as a rating event.
Low-Cost, Complex Refiner: TOP's ratings reflect its large production size compared with that of its domestic peers; its complex production facilities; and the resultant cost competitiveness and high utilisation rates. Continuous improvements in efficiency and an increase in higher-value products have helped TOP maintain its competitiveness.
Business Diversification: TOP's expansion into aromatics, lube base oil, and solvents has broadened its product range and reduced margin volatility. The start of benzene derivative production in 2016 has further increased its product range. Meanwhile, its investment in the power sector should help to partly offset the cash flow volatility of the refining business, although the power segment's contribution to EBITDA is small at 7% of total EBITDA in 2016.
Highly Cyclical: TOP's credit profile is tempered by the inherent cyclicality of its businesses and the concentration of its production facilities at one site. TOP also has high dependence on its largest shareholder, PTT Public Company Limited (PTT, AAA(tha)/Stable) for sales, but this is partly mitigated by PTT's strong credit profile, and by PTT's position as Thailand's main oil marketing and trading company. TOP is also exposed to supply risk, as Thailand is highly dependent on foreign crude oil imports.
One-Notch Uplift; PTT Links: TOP's Long-Term National Ratings incorporate a one-notch uplift from its standalone credit profile, reflecting moderate linkage with its 49% owner, PTT. This indicates TOP's strategic importance to PTT, as TOP is PTT's key refiner and meets about a third of PTT's requirements for its oil-retailing business.
DERIVATION SUMMARY
TOP's standalone credit profile of 'A+(tha)' reflects the size and complexity of its production facilities. Its business profile is strong relative to Thai downstream oil and gas peers, while it has low financial leverage. TOP's refinery is more complex and larger than that of IRPC Public Company Limited (A-(tha)/Stable, standalone credit profile of BBB+(tha)). The company also has much stronger balance sheet, and better operating profit margin given higher utilisation rate at its plant. However, TOP has smaller operating scale and less integration to petrochemicals than PTT Global Chemical Public Company Limited (PTTGC, AA(tha)/Stable, standalone credit profile of AA-(tha)). It also has lower profitability in comparison with PTTGC, which has large petrochemical operations with a higher operating margin.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- The benchmark Brent crude at USD52.5 per barrel in 2017, USD55 per barrel in 2018, USD60 per barrel in 2019, and USD65 per barrel thereafter – with TOP's crude procurement cost adjusted for applicable premiums
- Market refining margin to soften in 2017
- 105% refinery utilisation in 2017-2018
- Profitability from aromatics to improve gradually in 2017-2018 due mainly to improving product margins
- Capex to moderate in 2017-2018
RATING SENSITIVITIES
Future Developments That May, Individually or Collectively, Lead to Positive Rating Action
- FFO-adjusted net leverage sustained below 0.8x, although this is unlikely given expected high uncommitted capex over the medium term.
- Proof of stronger ties with PTT.
Future Developments That May, Individually or Collectively, Lead to Negative Rating Action
- Lower-than-expected refining margins and petrochemical spreads and/or an increase in debt-funded investments resulting in FFO-adjusted net leverage rising above 1.8x, on a sustained basis.
- Weakened ties with PTT.
LIQUIDITY
Strong Liquidity: TOP's liquidity is supported by its non-restricted cash of THB60.6 billion as of end-2016. This is far larger than the THB8 billion of debt maturing within the 12 months. Out of this maturing debt, THB4.5 billion are debentures due in 2017. TOP's liquidity is further supported by available committed working-capital facilities with financial institutions and short-term credit facilities from PTT, as well as its ability to raise funds in the capital market and from financial institutions. TOP's debt maturity profile is very comfortable with average term to maturity of 10.9 years.