Bangkok--12 Apr--Fitch Ratings
Fitch Ratings has affirmed Thailand-based PTT Public Company Limited's (PTT) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'BBB+' and 'A-', respectively. The Outlook is Stable.
The agency has also affirmed PTT's Short-Term Foreign-Currency IDR at 'F2', National Long-Term Rating at 'AAA(tha)' with Stable Outlook and National Short-Term Rating at 'F1+(tha)'. The National Long-Term Rating on its senior unsecured debt has been affirmed at 'AAA(tha)'.
Fitch has lowered PTT's standalone credit profile to 'BBB+' from 'A-' as a result of continuing weaknesses in its upstream operations, which are owned and operated via its 65%-held subsidiary PTT Exploration and Production Public Company Limited (PTTEP). The main weakness is the continued deterioration in proved reserves to levels worse than that of upstream peers rated in the 'BBB' category. Fitch also expects operating cash flows of PTTEP to continue to fall in 2016, although the company's financial leverage remains low and liquidity is solid.
PTT's IDRs and National Long-Term Ratings remain unchanged because its Long-Term Local-Currency IDR of 'A-' now incorporates a one-notch uplift on account of support from its parent, the Thai government (BBB+/A-/Stable), under Fitch's Parent Subsidiary Linkage methodology. This reflects the state's implicit support for PTT, given its majority ownership in PTT, and the size and national importance of PTT's operations.
PTT's Long-Term Foreign-Currency IDR is at the same as Thailand's Long-Term Foreign Currency IDR of 'BBB+' with Stable Outlook. Fitch would also provide a one-notch uplift to PTT's Long-Term Foreign Currency IDR, if its standalone rating falls below Thailand's Long-Term Foreign Currency IDR of 'BBB+'.
KEY RATING DRIVERS
Weakening Upstream Operations: Operating cash flows from PTT's exploration and production (E&P) business have decreased significantly due to lower oil and gas prices. We expect cash generation in 2016 from upstream to be lower than in 2015 because oil prices are likely to remain low. We however assume prices to increase over time as the market balance gradually returns. The key rating concern relating to the company's upstream operations is its weak reserve profile. Proved reserves have continued to fall to about five years as at end of 2015. The company has significant contingent resources that can be migrated over time with sufficient investments, but a material improvement in the proven reserve profile from organic sources is not likely in the next two to three years.
Flat to Falling Production: Costs in the upstream operations fell significantly in 2015, and there may be further, albeit limited, cost cuts in 2016. PTTEP has also reduced capex, which will reduce output from 2017. The company is likely to broadly maintain production in 2016 at the previous year's oil and gas output of 374,000 barrels of oil equivalent per day.
Possible M&A in Upstream: The company continues to look for M&A opportunities to address its reserve profile and aid growth in the short term. PTTEP has strong liquidity, including cash balances of USD3.3bn at end-2015, and low financial leverage. As such, the company can accommodate sizeable M&A and organic capex without significantly hurting its balance sheet. The company has also indicated that it would focus on small to medium-sized assets that are producing or close to production.
PTT's Integrated Profile: PTT's ratings reflect its integrated business model and the stability provided to PTT's overall risk profile from large and generally stable mid- and downstream operations. These operations provided a buffer against the large earnings deterioration in the upstream operations since 2H14.
Stable Cash Flow from Gas: PTT's financial profile benefits from relatively stable cash flows from its natural gas business, which is underpinned by steady demand and long-term supply and sales agreements with take-or-pay conditions on a cost-plus pricing structure. The profitability of its gas transmission operations, and natural gas sales to power producers and gas separation plants (GSP) are resilient to fluctuations in oil and gas prices.
However, earnings from the gas business have weakened along with lower oil prices, as the margins of natural gas sales to industrial users and gas products from the GSP have narrowed, due to the cost of gas purchases lagging the fall in product prices. We expect this situation to improve as cost of gas gets repriced over time and oil prices recover. Overall, PTT's mid-stream operations (excluding the refining and petrochemical affiliates that are consolidated in PTT's reported numbers from 2015) generally account for 20%-25% of the company's consolidated EBITDA (ex-affiliates).
Credit Metrics to Weaken: Fitch expects PTT's FFO-adjusted net leverage to increase in 2016 (2015: 1.3x) due to the expected lower operating cash flows and higher capex. Although PTTEP has reduced capex, capex at PTT will increase in the next two years, largely due to gas pipeline and LNG receiving terminal expansion. Overall, it is unlikely PTT will return to positive free cash generation in the next two to three years. However, its leverage, as measured by FFO-adjusted net leverage, should remain below 2.25x and FFO fixed-charge coverage over 7x in the medium term. PTT has large cash on hand to support its liquidity.
National Oil and Gas Company: PTT is dominant in Thailand's oil and gas industry, and plays a policy role in enhancing national energy security and development. It is the sole operator in the nation's natural gas transmission and distribution: it buys gas wholesale from producers and resells nearly all of the natural gas consumed in Thailand. PTT is also one of Thailand's major E&P companies, and a leading oil and petrochemical company.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Crude oil prices (Brent) of USD35 per barrel in 2016, USD45 per barrel in 2017, USD55 per barrel in 2018, and USD65 per barrel thereafter;
- Sales and production volumes of the E&P business to be flat in 2016, but EBITDA to decrease due to lower oil and gas prices;
- EBITDA from the gas business to remain soft in 2016;
- EBITDA from the petrochemical and refining business to decline in 2016 due to weakening product-to-feed margins, but to remain very healthy;
- Capex of 10%-12% of sales in 2016-2017;
- No M&A assumed; however, as mentioned, there is financial headroom for some M&A.
RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- an upgrade of Thailand's Long-Term Foreign-Currency IDR, provided the rating linkages remain intact
Positive action is not expected on its standalone credit profile over the next 18-24 months, given the weaknesses in its upstream operations, especially the reserve profile
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- a downgrade of Thailand's ratings
- weakening of operating and strategic linkages with the parent would cause a downgrade of PTT's Long-Term Local-Currency IDR
Factors that may lead to a negative action on PTT's standalone profile include:
- large debt-funded investment and/or weaker-than-expected operating cash flow resulting in a sustained deterioration in FFO-adjusted net leverage to over 2.75x
- weakening financial profile of its upstream operations, FFO-adjusted net leverage above 2.5x, and failure to address declining reserve life in the medium term
- adverse changes to regulations, gas sales contracts, and pipeline tariffs
For the sovereign rating on Thailand, the following sensitivities were outlined by Fitch in its Rating Action Commentary of 2 November 2015.
The main factors that could, individually or collectively, lead to negative rating action are:
- Persistently lower economic growth accompanied by the emergence of macroeconomic imbalances, for example through renewed political instability.
- Evidence that contingent liabilities stemming from broader public-sector debts and a highly leveraged private sector will crystallise on the sovereign balance sheet.
The main factors that could, individually or collectively, lead to positive rating action include:
- Substantial improvements to governance and development indicators, for example through the alleviation of political and social tensions.
- A sustained pick-up in economic growth above Fitch's expectations.