Bangkok--21 Jun--Fitch Ratings
Fitch Ratings (Thailand) has affirmed petrochemical and refining company PTT Global Chemical Public Company Limited's (PTTGC) National Long-Term Rating at 'AA(tha)', its National Short-Term Rating at 'F1+(tha)', and the senior unsecured national rating at 'AA(tha)'. The Outlook is Stable.
The affirmation reflects PTTGC's continued strong business profile as it is the largest fully integrated petrochemical and refining company in Thailand. The current low financial leverage provides headroom for the company to undertake additional investment.
KEY RATING DRIVERS
New Capacity Drives Growth: PTTGC's sales volumes are likely to increase in 2018-2021, driven by its new petrochemical capacity. The company started operation of its 434,000 tonnes per annum (tpa) liner low-density polyethylene plant and hexane-1 plant (mLLDPE project) in 1Q18 and expects commercial operation of its 200,000 tpa methyl ester plant 2 to start in 2H18. Meanwhile, the company's recent projects, including a propylene oxide and polyol project and an olefins reconfiguration project (ORP), will also help drive the company's growth in 2020-2021.
Deleveraging, High Uncommitted Capex: PTTGC's FFO adjusted net leverage improved to 0.8x in 2017 (2016:1.2x), mainly due to higher production and improved operating margins. Fitch expects PTTGC's operating cash flows to cover the majority of its committed capex and dividend payments in 2018-2019. As a result, PTTGC's FFO adjusted net leverage should remain low in 2018-2019. However, PTTGC has USD2.6 billion of committed capex over the next three years and a significant discretionary investment plan under review. Fitch will review the impact of the investment on the company's credit profile once PTTGC finalises the investment amount and funding structure.
Fully Integrated, Low-Cost Producer: The company's large operating scale, wide product range and high utilisation rate result in larger operating cash flow and a higher operating margin than its domestic petrochemical and refining peers. Furthermore, PTTGC benefits from its cost competitive feedstocks - as majority of its olefins feedstock is gas-based and available domestically, and its favourable gas supply agreement with its parent, PTT Public Company Limited (PTT (AAA(tha)/Stable), which reduces margin volatility when market conditions fluctuate.
Highly Cyclical Business: PTTGC's credit profile is tempered by the inherent cyclicality of the petrochemical and refining sector. The volatility of product-to-feed margins, refining margins, feedstocks prices, oil prices and working-capital requirements could affect PTTGC's earnings and cash-flow generation significantly. PTTGC is also exposed to supply concentration risk as the majority of its feedstock supply is secured from its major shareholder, PTT. This is mitigated by PTT's strong credit profile and its position as Thailand's leading oil and gas company.
Linkages with PTT: PTTGC's Long-Term National Ratings incorporate a one-notch uplift from its standalone credit profile of 'AA-(tha)', reflecting its moderate links with PTT. PTTGC is PTT's largest petrochemical subsidiary and flagship in expanding in the petrochemical business, which was demonstrated by PTT injecting petrochemical assets in PTTGC in 2017. Some of the benefits from its association with PTT, such as feedstock supply and product offtake agreements, are incorporated in its standalone credit profile.
DERIVATION SUMMARY
PTTGC's standalone credit profile of 'AA-(tha)' reflects its large operating scale and integration along the petrochemical value chain, as well as its low-cost position as a gas-based petrochemical producer. It has the strongest business profile among Thai downstream oil and gas peers, while its financial leverage is low. PTTGC has larger operating scale and is better integrated in petrochemicals than Thai Oil Public Company Limited (TOP, AA-(tha)/Stable, standalone credit profile of A+(tha)). It also has better profitability than TOP. PTTGC's operations are larger and more diversified than those of IRPC Public Company Limited (A-(tha)/Stable, standalone credit profile of BBB+(tha)). In addition, it has a much stronger balance sheet, and better operating profit margin.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Benchmark Brent crude price at USD70.0 per barrel in 2018, USD65.0 in 2019, USD57.5 in 2020 and thereafter, with PTTGC's crude procurement cost adjusted for applicable premiums
- Market refining margin to soften in 2018
- Aromatic's profitability to slightly soften in 2018 and stay broadly flat thereafter
- Olefins and derivatives' profitability to slightly soften in 2018 and gradually improving thereafter
- USD3 billion of capex over 2018-2022, including committed capex, investment and maintenance costs
RATING SENSITIVITIES
Developments That May, Individually or Collectively, Lead to Positive Rating Action
- Evidence of stronger ties with PTT
- Positive action on PTTGC's standalone rating is unlikely in the medium term, given its large capex plans and the long time these investments require before they generate cash.
Developments That May, Individually or Collectively, Lead to Negative Rating Action
- A sustained rise in leverage (as measured by FFO adjusted net leverage) to above 1.5x, due to large debt-funded investments and/or persistently thin refining margins and petrochemical spreads
- Weaker ties with PTT
LIQUIDITY
Strong Liquidity: PTTGC's liquidity is supported by its non-restricted cash and cash equivalents of THB55.1 billion at end-March 2018. This is more than adequate to cover its THB9.1 billion of debt maturing within the next 12 months. The debt repayment schedule is well-spread over the next three years. The large repayments are in 2021-2022, when THB20 billion and USD1 billion of notes are due. The liquidity is reinforced by PTTGC's low leverage and its ability to raise funds in the capital markets.