Bangkok--27 Jan--Fitch Ratings
Fitch Ratings (Thailand) Limited has today affirmed Thai Oil Public Company Limited’s (TOP) National Long-term rating at ‘AA-(tha)’ and National Short-term rating at ‘F1+(tha)’. At the same time, the agency has affirmed the ‘AA-(tha)’ National Long-term rating on TOP’s senior unsecured debentures. The Outlook on the Long-term rating has been revised to Negative from Stable.
The Negative Outlook reflects TOP’s higher-than-expected financial leverage in 2009. Also, the continuing weak operating environment could result in a further delay in the company’s deleveraging over the next two years, while its credit metrics are stretched for the current rating level.
TOP’s net debt was higher-than-expected in 2009, mainly a result of higher working capital requirements due to rising oil prices, weakening refining margins and a higher-than-expected dividend payout. These factors were only partly mitigated by a strong performance of paraxylene and a sharp decrease in capex. TOP’s net debt was THB43.1bn at end-Q309. Its annualised FFO-adjusted net leverage and adjusted net debt to annualised EBITDAR were 1.8x and 2.0x, respectively, for 9M09, compared to about 1.0x during 2005-2007.
The oil refinery and petrochemicals industries are facing the risk of significant new capacity, while the demand outlook remains weak (although the agency anticipates gradual demand recovery for 2010). This is likely to continue to put pressure on refining margins, petrochemicals spreads and utilisation through 2010.
TOP’s ratings reflect its large scale, highly complex production capacity and cost competitiveness. The ratings also take into account its strategic and operational links to PTT Public Company Limited (PTT) as its major refinery. TOP’s forward integration into aromatics and lube base oil production has increased its oil value chain, and reduces the volatility of its refining margins. In addition, its investment in the power businesses should help to partially offset the earnings volatility of the refining business, although the contribution of this segment to EBITDA has been relatively small.
TOP’s credit profile is constrained by its high vulnerability to oil prices and fluctuations in gross refining margins (GRMs), and the cyclicality of its aromatics business. TOP is also exposed to supply risk, as Thailand is highly dependent on foreign oil supplies. Other credit concerns relate to its high customer concentration and its exposure to both a single production site and a single market, although customer concentration is partly mitigated by the fact that PTT, the largest off-taker, is the main player in oil marketing and trading in Thailand — and highly rated at ‘AAA (tha)’.
The ratings may be downgraded if adjusted net debt/EBITDAR is not reduced to 1.0x by 2011, or if the average GRMs (excluding inventory gains and losses) are sustained at below USD3 per barrel for the next 12-18 months. In contrast, stronger-than-expected cash flow generation, which could help faster de-leveraging, would revert the Outlook back to Stable.
Applicable Criteria available on Fitch’s website at www.fitchratings.com: “Corporate Rating Methodology,” dated November 24, 2009 and “Credit Rating Methodology for Refiners,” dated November 9, 2007.
Contacts: Lertchai Kochareonrattanakul, Ekapan Prompraphant, Vincent Milton, Bangkok, +662 655 4755.
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.
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