Bangkok--9 Oct--Fitch Ratings
Fitch Ratings (Thailand) Limited has today assigned an ‘AA-(tha)’ (AA minus(tha)) National Long-term ratings to Thai Oil Public Company Limited’s (“TOP”) upcoming two tranches of three-year and seven-year unsecured and unsubordinated debentures totaling up to THB5.5 billion, due 2009 and 2013, respectively. The Outlook on the ratings is Stable.
The ratings reflect TOP’s strategic importance to PTT Plc (“PTT”) as the major refinery vehicle for the PTT group and the high operational inter-dependence with PTT in the form of crude oil procurement and product off-taking. The ratings also take into account TOP’s strong financial position and its plan to maintain low leverage in the future. While severely affected by the 1997 financial crisis, TOP’s financial position has improved significantly since 2001, owing to its restructuring, the strong recovery in its oil refining business and its policy of lowering financial leverage. Its net adjusted debt/last-twelve-month EBITDAR declined to 0.8x in H106 from 12.7x in 2001, while its EBITDA/gross interest rose to 13.1x in 2005 and 16.1x in H106 from below 4.0x during 2001 to 2003. Despite high capital expenditure in 2006 and 2007, the company’s financial position is likely to remain strong with net debt/EBITDA of below 1.0x, given an expectation of continuing strong operating cash flow thanks to a promising oil refining outlook over the next one to two years and its increasing refining and petrochemical capacity. The agency also notes that the demand and supply balance of the oil refining sector looks favourable, given limited planned new capacity relative to expected increasing demand.
Fitch also said that the ratings take into account TOP’s large scale and complex production capacities and cost competitiveness. TOP has maintained strong cost competitiveness relative to its peers in the region. In addition, the forward integration into paraxylene and lube base oil production increases its oil value chain and reduces its refining margin volatility, while a diversification into the power business should help partially offset its earnings volatility from the refining business, although the latter’s current EBITDA contribution is relatively modest.
The rating concerns focus on its exposure to a high degree of volatility in gross refining margins and petrochemicals prices, which have a substantial impact on its earnings and cash flow generating capability. The ratings also take into account a high customer concentration and relatively high exposure to a single production site and a single market, mainly domestic. Nevertheless, high customer concentration is partly mitigated as PTT, which offtakes around half of TOP’s refined oil output under the contract, is the largest player in oil marketing and trading in Thailand and has a high rating of ‘AA+(tha)’ with a Positive Outlook.
The Stable Outlook reflects TOP’s relatively strong market position, supported by its cost competitiveness and a conservative financial policy. As TOP is highly exposed to the cyclical nature of oil refining and petrochemicals businesses, its ratings would be affected should the company fail to maintain its net debt/EBITDA at around 1.0x on a sustained basis.
TOP is the largest single-site and the most complex oil refinery in Thailand with the current nameplate capacity of 225,000 barrels per day, accounting for 22% of the nation’s refining capacity. The company has integrated into paraxylene and lube base oil production through its wholly-owned subsidiaries, Thai Paraxylene Company Limited and Thai Lube Base Plc. TOP also diversifies its investment into the power sector via its 55%-owned Thaioil Power Company Limited, a small power producer, and its 55% directly- and indirectly-owned Independent Power (Thailand) Company Limited. TOP currently is 49.54% owned by PTT, the largest fully integrated oil and gas company in Thailand, with the remaining shares publicly owned.
Note to Editors: Fitch’s National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated ‘AAA’ and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as ‘AAA(tha)’ for National ratings in Thailand. Specific letter grades are not therefore internationally comparable.
Contacts: Lertchai Kochareonrattanakul Tel: +662 655 4760; Wasant Polcharoen +662 655 4763; Vincent Milton +662 655 4759.
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