Fitch Ratings (Thailand) has assigned an 'A+(tha)' rating to Thai Oil Public Company Limited's (TOP; A+(tha)/Negative) proposed senior unsecured debentures of up to THB12 billion.
The proposed debentures constitute direct, unsecured, unconditional and unsubordinated obligations of the company and are rated at the same level as TOP's National Long-Term Rating, in line with its other senior unsecured debt. The proceeds will be used as working capital, to refinance existing debt and to fund capex and investment.
KEY RATING DRIVERS
Strong Earnings in 2022: Fitch expects TOP's EBITDA to double to about THB56 billion in 2022 from THB26 billion in 2021. TOP will benefit from remarkably high gross refining margins in 2022 due to the Russia-Ukraine conflict, and economic and country reopenings as well as large inventory gains, although this was partly offset by hedging losses as actual product prices exceeded hedging prices. The company reported refining margins (including inventory gains and hedging losses) of about USD19 per barrel in 1H22 (1H21: USD6 per barrel).
Fitch expects EBITDA to reduce in 2023-2024 as we expect refining margins to soften. However, refining margins should remain strong relative to those in 2018-2020. Nevertheless, the government's proposal to protect consumers from rising fuel costs, such as via a windfall tax or other forms of support from refinery operators, if implemented, could have a significant impact on TOP's earnings.
Significant Delay to CFP: The delay in the start of TOP's clean-fuel project (CFP) will result in additional capex and delayed cash flow from the project. The project will be delayed by almost two years from the original schedule due to disruptions from the coronavirus pandemic. TOP now expects to achieve full commercial operation at the CFP by early 2025, although some units will start commercial operations in 2024. The delay will add about 10% to project cost, or about USD450 million-USD550 million, according to the company. Fitch has not incorporated operating cash flows from the CFP until 2025.
High Committed Capex: TOP's capex will remain high and less flexible in 2022-2024 due to the CFP project. TOP also plans to build a new gas-fired power plant to replace an existing facility that will be operating for 25 years by March 2023. The company plans to spend about USD2.2 billion (excluding the proceeds from sales of the energy recovery unit) for the two projects, mostly for the CFP, in 2022-2024. This will result in continued negative free cash flow (FCF) in 2022-2023.
Recapitalisation as Planned: The recapitalisation plan for investment in PT Chandra Asri Petrochemical Tbk (CAP) remains on track, although the equity increase has been delayed by one to two quarters. TOP sold its 10.8% stake in Global Power Synergy Public Company Limited (GPSC, A+(tha)/Stable) for about THB22 billion (before taxes), and used all the net proceeds to repay bridging loans in 2Q22. TOP's shareholders have approved a capital raising and the company has launched the offering, and expects to complete subscription in 4Q22.
Credit Term Extension: TOP started to extend the credit terms for its crude oil purchases from its 45% shareholder PTT Public Company Limited (BBB+/AAA(tha)/Stable) from the beginning of 2022. The company targets to increase the credit terms to 90 days by end-2022 from the normal 30 days. This will help TOP to reduce working-capital requirements as a result of increasing crude oil prices and provide the flexibility to manage its financial leverage and liquidity during its high-investment period. The credit terms will be reviewed annually and can be extended by a mutual agreement.
CFP Improves Business Profile: The CFP will increase TOP's refining capacity and complexity, which will allow it to produce a bigger proportion of middle and light distillates and refine heavier crude oil. TOP's complex facilities and high utilisation rates will enhance its cost competitiveness, provide crude-sourcing flexibility, and allow it to optimise its product slate, which will support higher margins than domestic peers.
Petrochemical Diversification as Planned: The CAP investment is in line with TOP's strategy to diversify away from the petroleum business. However, TOP has limited ability to access the cash flow from its investment through dividends as it is a minority shareholder. Nevertheless, TOP will benefit from feedstock supply agreements with CAP, which will provide captive demand for its liquefied petroleum gas and naphtha output from the CFP, although the deal is on an arm's length commercial terms.
Linkage with Parent: TOP's National Long-Term Rating incorporates a two-notch uplift from its Standalone Credit Profile (SCP) of 'a-(tha)', reflecting our view that PTT has 'Medium' incentives to support TOP under Fitch's Parent and Subsidiary Linkage Rating Criteria. Fitch believes the petrochemical and refinery business, of which TOP is a major component, is strategically important to PTT. This underpins our assessment of 'Medium' strategic and operational incentives. The legal incentives are assessed as 'Weak'.
TOP is PTT's largest refinery, and likely to be PTT's main vehicle in refining. TOP supplies about one-third of PTT's refined product sales. PTT also extended the credit terms for crude supply to TOP to alleviate the subsidiary's cash flow pressure and bought the company's shares in GPSC to support TOP's acquisitions.
TOP's SCP reflects the size and complexity of its production facilities. Its business profile is strong relative to that of Thai downstream oil and gas peers. However, its financial leverage will be relatively high.
TOP's refinery is more complex and larger than that of IRPC Public Company Limited (A-(tha)/Stable; SCP: bbb(tha)), although IRPC has more integration with petrochemicals. TOP runs at higher utilisation rates, resulting in better operating profit margins through the cycle. Both companies should have comparable financial leverage over the medium term, although that of TOP will be temporarily higher during the CFP construction. As a result, TOP's SCP is higher than that of IRPC.
TOP has a smaller operating scale and less integration with petrochemicals than PTT Global Chemical Public Company Limited (PTTGC, AA(tha)/Stable; SCP: a+(tha)). PTTGC also has better profitability due to its large petrochemical operations, which have higher operating margins and better credit metrics. These factors lead to TOP's SCP being lower than that of PTTGC.
Fitch's Key Assumptions Within Our Rating Case for the Issuer
- Benchmark Brent crude price at USD100 per barrel in 2022, USD85 per barrel in 2023, USD65 per barrel in 2024 and USD53 in 2025 and thereafter, with TOP's crude procurement costs adjusted for applicable premiums;
- Refinery margins to improve substantially in 2022 and weakening in 2023-2024
- Refinery utilisation rate of 105% in 2022-2024 and 85%-90% in 2025-2026 when the CFP starts
- Aromatic business' and lube base business' profitability to weaken substantially in 2022 and recover in 2023
- About USD1.9 billion in capex over 2022-2025, including the CFP minus the proceeds from the sale of TOP's energy recovery unit, small power plant replacement, committed capex and maintenance capex
- About USD270 million additional investment for the CAP stake in 2022
- Capital increase of about THB10 billion in 2022
- Extension of credit terms on crude supply from PTT to 90 days in 2022-2024, from 30 days
- 40%-50% dividend payout ratio
Factors that could, individually or collectively, lead to positive rating action/upgrade:
- The Outlook could be revised to Stable if TOP is on track to reduce its net debt/EBITDA to below 4.5x in the next 12-18 months, assuming completion of the investment and recapitalisation plan within the company's expected timeline;
- Evidence of stronger ties with PTT.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
- Net debt/EBITDA sustained above 4.5x;
- Weakened ties with PTT.
LIQUIDITY AND DEBT STRUCTURE
Adequate Liquidity: TOP's liquidity is sufficient, supported by non-restricted cash and cash equivalents of THB44.7 billion as of end-June 2022. This is adequate to cover THB33.7 billion in debt maturing over the next 12 months from June 2022. The liquidity is also supported by a THB2.0 billion credit facility from PTT, THB7.2 billion in committed facilities and THB10.1 billion in uncommitted facilities from financial institutions, and its ability to raise funds in the capital market.
Fitch expects TOP to generate negative FCF in 2022-2023 due to high capex. This will be funded mainly by debt. The remaining bridging loans will be repaid by the proceeds from the capital raising in 2022. TOP has a comfortable debt maturity profile, with an average debt life of about 15 years.
TOP is the largest and most complex oil refinery in Thailand with a nameplate capacity of 275,000 barrels per day (bpd). Its refining capacity will increase to 400,000bpd after the completion of the CFP. The company has diversified into downstream businesses, including aromatics and lube base oil, and support and other businesses, including solvent, ethanol and power businesses.
DATE OF RELEVANT COMMITTEE
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
TOP's rating receives a two-notch uplift based on our assessment of 'Medium' incentives for support from the parent, PTT.
Additional information is available on www.fitchratings.com