Bangkok--7 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 National Long-Term Rating at 'AAA(tha)'. The Outlook is Stable. A full list of rating actions follows at the end of this release.
The affirmation and its standalone rating of 'BBB+' reflect its integrated business model and strong financial position, although the upstream profile remains challenged. The current low leverage provides financial headroom for the company to address depleting reserves and production in the upstream business. PTT's standalone rating is at the same level as the sovereign.
KEY RATING DRIVERS
Upstream Challenges Continue: Fitch expects the reserves profile of PTT's upstream operations to remain weak, compared with our 'BBB' category exploration and production companies. Its oil and gas proved reserves continued to decline in 2016. The company has significant contingent resources that can be migrated in due course with sufficient investments, but a substantial improvement in the proved reserves profile from organic sources is not likely in the next two to three years. In addition, its oil and gas production will decline in 2017-2020, unless supplemented by M&A. Fitch, however, expects cash generation from upstream to stabilise and recover in 2017-2018, as we assume oil prices will ultimately rise as the market balance gradually returns.
Renewal Risk on Bongkot: PTT faces renewal risks in relation to its Bongkot-concession expiry. The loss of this project would have a major impact on its upstream operational profile - both in terms of production and reserves. The Bongkot concession contributed about 24% of production. This would worsen its already-weak operational profile relative to 'BBB' category upstream peers. The company may also be subject to high payments for renewal, given that valuations would reflect this immediately earnings-accretive asset, amidst a gradual recovery in oil prices. The Petroleum Act - recently approved by the National Legislative Assembly - will provide the frame for the renewal of this and further concessions, with the potential to move away from the current concession model. The Ministry of Energy said that the bidding process of Bongkot should start in July 2017 and conclude by the end of the year. Fitch views PTT Exploration and Production Public Company Limited's (PTTEP) experience as the existing operator of the field could be advantageous for its bid, although this may not be enough to guarantee renewal of the field.
Headroom to Support Investments: PTT's FFO-adjusted net leverage improved to about 1.1x in 2016 from 1.8x in 2014. This was supported by stronger-than-expected operating cash flows, driven mainly by strong natural gas and downstream operations, as well as lower capex. Fitch expects leverage to remain at this level in 2017-2018, despite higher capex. This will give the company more headroom to support M&A opportunities in the upstream business, and make additional investments.
Capex to Increase: Fitch expects higher capex for PTT and its subsidiaries in 2017, after capex cuts in 2015-2016. Somewhat improved oil prices mean that the company is likely to boost its investments in 2017-2018 to support its medium-term growth. Nevertheless, PTT is likely to remain cautious on investments. The five-year capex plan (2017-2021) of PTTEP, PTT's exploration and production (E&P) arm, has been below the plans (2016-2020) in the prior year.
Ratings Reflect Integrated Model: 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, the earnings of GSP operations and natural gas sales to industrial users are more exposed to fluctuations in oil and gas prices, as the adjustment of the cost of gas purchases (based on long-term contracts) will lag that of product prices.
Moderate Linkages with Parent: Fitch rates PTT on a bottom-up basis, reflecting moderate linkages with its parent, the Thailand state, as assessed under Fitch's parent and subsidiary rating linkage criteria. The agency would provide a one-notch uplift to PTT's IDRs if its standalone rating falls below Thailand's Long-Term IDRs of 'BBB+' to reflect these linkages.
DERIVATION SUMMARY
PTT's ratings reflect its integrated business model. Its upstream operational profile is weak, relative to its 'BBB+' rated upstream peers. Business diversification to mid- and downstream and large exposure to gas in the upstream business, which is more stable, support the company's ratings. The ratings also reflect its medium-sized operating scale. PTT is significantly smaller than China National Petroleum Corporation (A+/Stable) and Petroliam Nasional Berhad (PETRONAS, A-/Stable), whose ratings are constrained by that of the sovereign. PTT has a comparable operating scale with OMV AG (A-/Negative) and Repsol, S.A. (BBB/Negative), but a weaker reserves profile. However, PTT has stronger credit metrics than Repsol.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Crude oil prices (Brent) of USD52.5 per barrel in 2017, USD55 per barrel in 2018, USD60 per barrel in 2019, and USD65 per barrel thereafter;
- Sales volumes of the E&P business to reduce in 2017-2018, but EBITDA to stabilise in 2017 and recover in 2018;
- EBITDA from the gas business to remain strong in 2017;
- EBITDA from the petrochemical and refining business to decline in 2017, but to remain very healthy;
- Capex to increase 2017-2018;
- No M&A assumed; however, as mentioned, there is financial headroom for some M&A.
RATING SENSITIVITIES
Future Developments That May, Individually or Collectively, Lead to Positive Rating Action
- An upgrade of Thailand's IDRs, provided the rating linkages remain intact.
- Positive action is not expected on its standalone credit profile over the next 18-24 months due to weakness in its upstream operations, especially reserves profile.
Future Developments That May, Individually or Collectively, Lead to Negative Rating Action
- A downgrade of Thailand's ratings.
Factors that may lead to negative action on PTT's standalone profile include:
- Large debt-funded investment or weaker operating cash flow resulting in a sustained deterioration in FFO-adjusted net leverage to over 2.8x.
- A 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 or pipeline tariffs.
For the sovereign rating on Thailand, the following sensitivities were outlined by Fitch in its Rating Action Commentary of 22 July 2016.
The main factors that could, individually or collectively, lead to positive rating action include:
- A sustained improvement in growth above expectations without the emergence of imbalances.
- Resolution of social and political cleavages sufficient in scale to improve governance and development indicators.
The main factors that could, individually or collectively, lead to negative rating action are:
- Renewed political instability on a scale sufficient to have a significant impact on Thailand's economy.
- A sharp and sustained rise in Thailand's government debt ratios, for example due to a fiscal deterioration or materialisation of contingent liabilities on the sovereign balance sheet.
LIQUIDITY
Solid Liquidity: PTT's liquidity reflects its available cash of THB370.1 billion at end-2016, compared with THB94.6 billion of debt maturing within the following 12 months. Its liquidity is also supported by solid cash flow generation, and access to the debt-capital markets and bank funding. PTT's debt maturity profile remains comfortable, with an average term to maturity of 7.3 years.
FULL LIST OF RATING ACTIONS
PTT Public Company Limited
- Long-Term Foreign-Currency IDR affirmed to 'BBB+'; Outlook Stable
- Long-Term Local-Currency IDR affirmed to 'BBB+'; Outlook Stable
- Short-Term Foreign-Currency IDR affirmed to 'F2'
- National Long-Term Rating affirmed to 'AAA(tha)'; Outlook Stable
- National Short-Term Rating affirmed to 'F1+(tha)'
- National Long-Term Rating on its senior unsecured debt to 'AAA(tha)'.