Bangkok--29 Jun--Moody's Investors Service
Moody's Investors Service has downgraded to A3 from A2 PTT Exploration and Production Public Company Ltd's (PTTEP) local currency issuer rating. At the same time, Moody's has affirmed its A3 foreign currency issuer rating. The ratings outlook is negative, in line with the negative outlook of Thailand's sovereign rating.
"The downgrade reflects Moody's expectation that as a result of PTTEP's substantial development and investment program -- to be funded by higher levels of debt -- its credit metrics in the next 3 years would remain at levels no longer commensurate with its previous rating," says Renee Lam, a Moody's Vice President and Senior Analyst.
"Event risk has also risen in view of the increased appetite for acquisitions," adds Lam.
In the next three years, PTTEP plans E&P expenditures of about THB70 billion annually, a substantial rise from the yearly average of THB49 billion over the last three years.
Moody's notes that PTTEP has shown an increased appetite for acquisitions to gain immediate access to reserves. After the purchase of reserves in Australia for US$170 million in 2009, the company has indicated that it is open to more sizeable acquisition opportunities of US$1.5-3 billion.
To fund its investments, PTTEP incurred more debt in 2009 -- total debt rose to THB71.8 billion in 2009 from THB21.5 billion in 2008 -- and will continue to increase leverage in 2010.
Over the next few years, its retained cash flow (RCF) minus sustaining capex to debt is expected to remain below 40%. Such forecast metrics are more akin to the stand-alone Baa1 profile for an E&P player.
Moody's also has concern over the incremental reinvestment risk that PTTEP faces with its sizeable development capex and previous project delays. And with new planned investments, such risk is not declining, as reflected by the delay in the Montara project in Australia due to an oil spill.
PTTEP's stand-alone Baa1 rating continues to incorporate the stability afforded by its long-term gas sales contracts, and its strategic role as a gas supplier to Thailand's power sector.
PTTEP's final A3 rating factors in a one-notch uplift based on Moody's assessment of the credit support that its parent, PTT Public Company Ltd (PTT, rated A3/negative), is likely to provide in case of distress.
PTTEP's negative ratings outlook reflects the negative outlook of PTT, which is in turn driven by the negative outlook of Thailand's sovereign rating.
Near-term upward rating pressure is limited given the negative outlook.
The outlook will be stabilized if PTT and Thailand's sovereign rating outlook is reverted to stable.
On the other hand, PTTEP's ratings could experience downward pressure if PTT and Thailand's sovereign ratings are downgraded, or if there is any reduction in the expected support from its parent PTT.
Downward rating pressure would also emerge if PTTEP's standalone fundamental strength weakens, reflected by adjusted RCF- sustaining capex / debt remaining at below 30-35%, which could be a result of 1) major disappointments in implementing its reserve replacement and expansion plans; 2) a material downturn in the energy sectors.
The last rating action on PTTEP was on June 3, 2009 when Moody's changed to negative from stable the outlook for the company's A2 local currency issuer rating.
The principle methodology used in rating PTTEP was Moody's "Global Independent Exploration and Production (E&P) Industry," which can be found at www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating PTTEP can also be found in the Rating Methodologies sub-directory on Moody's website.
PTTEP is engaged in the exploration and production of crude oil, condensate and natural gas. Established by the Petroleum Authority of Thailand (now PTT) in 1985 as part of a national energy strategy, it is now a listed company with PTT retaining 65.42% ownership.
Hong Kong
Renee Lam
Vice President - Senior Analyst
Corporate Finance Group
Moody's Asia Pacific Ltd.
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077
Hong Kong
Gary Lau
Managing Director
Corporate Finance Group
Moody's Asia Pacific Ltd.
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077