Bangkok--May 27--Moody's Investors Service
Moody's Investors Service has assigned a provisional foreign currency long-term rating of (P) Baa1 to the proposed
US$ bonds of Thai Oil Public Company Ltd (Thaioil). The bonds are
intended to refinance existing debt, and it is expected that the (P) Baa1 rating will be made final upon issuance of the debt. The rating outlook is stable.
Moody's says the Baa1 rating reflects Thaioil's strong position in the
domestic oil refining sector; the modern and efficient nature of its refinery, which drives a competitive cost position; very strong debt coverage measures, driven by a favourable operating environment and debt reduction; and Moody's expectation of free cash flow generation over the next 2-3 years, based on the company's capital investment plan.
At the same time, the rating reflects the high cyclicality inherent in
the oil refining industry, limited downstream integration into oil marketing and exposure to a single-site complex. Other risk factors include execution risk related to the company's brownfield capacity expansion and customer concentration issues.
The stable outlook reflects the expectation that Thaioil will maintain
strong cash coverage measures over the next 12-24 months, incorporating assumed moderation in oil refining margins.
Moody's further says that the Baa1 rating recognizes the close business
integration with PTT Public Company Ltd (PTT; rated A3 for local currency fundamental rating), which maintains 49.54% ownership in Thaioil. PTT plays a key role in Thaioil's crude procurement and is a major off-taker of its refined products, which supply a significant portion of its oil retail network. The two companies have a long-term agreement until at least 2014. Accordingly, Thaioil's Baa1 rating has been uplifted by one notch reflecting these factors, and the potential for support being provided by PTT.
Thaioil has a very competitive cost profile, driven by its efficient
refinery, with its high upgrading capability and flexibility in the choice of crude intake and product output. These factors and the refinery's high reliability enable Thaioil to produce refined products at very competitive costs. In 2004, its refining EBITDA was $7.09/bbl, which is very competitive compared to other rated peers.
Thaioil has generated free cash flow since 2001 and Moody's expects this
situation to continue over the next 2-3 years, despite the company's active capital expenditure program over that period. The ability to generate free cash flow provides rating support.
Moody's expects the company to maintain strong credit protection measures over the medium term with the ratio of Retained Cash Flow (RCF)/Adjusted
Debt above 45%-50% over the next three years based on current growth plan, and assuming weakening refining and petrochemical margins from the current high levels. This and other financial and operating metrics are stronger in many respects than regional and international peers rated investment grade.
The rating, however, considers Thaioil's asset concentration risk and
limited downstream integration, which elevates exposure to the cyclical oil refining industry and which is different to most other investment grade peers. The company's other non-refining businesses, and its business integration with PTT, partly mitigate this risk.
Thaioil is undertaking a moderate brownfield expansion program over the
next two years at an overall cost of around $500 million. The program revolves mainly around increasing its oil refining and paraxylene (PX) production capacity, upgrading its ship-receiving capability at the port, and establishing small/mid-size toluene and benzene units.
Moody's notes the refinery's capacity growth project falls within
management's expertise in view of its solid record in this area. The planned toluene/benzene plants carry a moderate degree of execution risk. Moody's expects Thaioil to fund its capital expenditure over the next two years from operating cash flow, limiting the need for incremental debt.
Upward rating trend could evolve over time if Thaioil succeeds in managing and implementing its capacity growth projects within specified budgets
and timeframes and maintains RCF/Adjusted Debt above 50% across the next 3-5 years. Alternatively, greater operational diversity could be a positive rating factor albeit Moody's does not expect this.
On the other hand, the rating may experience a downward trend if 1)
Thaioil faces major disappointments in implementing its production growth plans, 2) the company undertakes aggressive capital investment that materially changes its business mix, and 3) oil refining fundamentals deteriorate beyond our expectations, such that RCF/Adjusted Debt drops below 25% across the next 3-5 years. The rating could also be pressured if PTT reduces its ownership in Thaioil, or if there is a material change to the sales and off-take agreement between the two companies.
Thai Oil Public Company Ltd is predominantly engaged in oil refining and
headquartered in Bangkok, Thailand. The company owns and operates a 220,000 barrels/day refinery and a paraxylene plant with an annual capacity of 348,000 tons. The company also has power, lube base and marine operations. For the fiscal year ending 31 December 2004, it generated sales revenue of Baht 184.8 billion.
Sydney
Terry Fanous
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Pty Ltd
612 9270 8100
Sydney
Brian Cahill
Managing Director
Corporate Finance Group
Moody's Investors Service Pty Ltd
612 9270 8100 End.