TRIS Rating Affirms Company & Issue Ratings of “PTTEP” at “AAA”, with “Stable” Outlook

TRIS Rating has affirmed the company rating of PTT Exploration and Production PLC (PTTEP) and the ratings of PTTEP’s senior debentures at “AAA” with “stable” outlook. The ratings continue to reflect the company’s leading position in the petroleum exploration and production (E&P) industry in Thailand, solid asset base, the support received as the E&P arm of the Thai government, and healthy financial profile. The ratings also take into consideration the recent acquisition of a 40% interest in the Kai Kos Dehseh Oil Sands Project (KKD) in Canada, and the execution risk connected with its overseas operations.

The “stable” outlook reflects TRIS Rating’s expectation that PTTEP will maintain its healthy financial position despite the large capital expenditures planned for 2011- 2015. The level of leverage is expected to improve by 2012, through the company’s disciplined and conservative financial policy. The Montara project is expected to start production on schedule without any material litigation and license issues.

TRIS Rating reported that PTTEP is the leading petroleum E&P company in Thailand. It was established in 1985 to hold petroleum concession rights on behalf of the Thai government. As of February 2011, PTT PLC (PTT), the national oil and gas company, held a 65.3% stake in PTTEP. PTT and PTTEP remain state enterprises as defined by Thai law. As the E&P arm of PTT and the Thai government, PTTEP has leveraged its position to participate in petroleum projects with high potential, both in Thailand and abroad.

As of December 2010, total proven petroleum reserves owned by PTTEP, including reserves from overseas projects, were 1,043 million barrels of oil equivalent (mmboe), a 5.1% decrease from 2009. Reserves from overseas projects constituted 41% of total proven reserves in 2010, a slight rise from 40% in 2009. Given the sales volume of 264,575 barrels of oil equivalent per day (boed) for 2010, the reserves should last about nine years, which is slightly lower than the 10-15 years of reserves at world-class E&P companies. As of February 2011, the company had 44 projects on hand, 20 of which were in the production phase, with the remainder in the exploration and development phases.

TRIS Rating said, PTTEP’s operating efficiency remains competitive, though costs have increased, comparing with international E&P peers. Its lifting cost increased from US$3.16 per barrel of oil equivalent (boe) in 2009 to US$3.75 per boe in 2010, due mainly to the high lifting costs in new production projects. The three-year average cost ending in 2010 for finding and development (F&D) increased to US$13.58 per boe from US$11.10 per boe in 2009. The F&D cost is expected to approach US$20 per boe in 2011 after including the acquisition cost of US$2,276 million for the KKD project and increases in capital expenditures. Although the KKD project should secure PTTEP’s reserves in the long term, production cost at this unconventional site would be higher than the conventional projects. PTTEP may also face execution risk until 2015 when the production level of KKD ramps up.

The overall financial position of PTTEP remains strong, though it is expected to be weaker in 2011. Although the Thai baht appreciated versus the US dollar by 6.6% in 2010, PTTEP’s total sales increased by 19.8% to Bt138,474 million, as sales volume increased by 13.2% to 264,575 boed and the average selling price rose by 13.4%. The operating margin before depreciation and amortization slightly improved from 71.6% in 2009 to 72.1% in 2010. The earnings before interest, tax, depreciation and amortization (EBITDA) interest coverage ratio decreased from 46.2 times in 2009 to 40 times in 2010.

PTTEP’s capital expenditures for 2011-2015 of approximately Bt55,000-Bt95,000 million annually are higher than the previous plan of Bt30,000-Bt80,000 million annually. The increase is mainly driven by the higher production and development costs in new projects, such as KKD. Approximately 49% of this budget is for investments in Thailand, while the rest will be spent on projects in Southeast Asia (23%), North America (18%), Australia (6%), and others (4%). Capital spending of Bt94,475 million for 2011 is projected to be funded largely through operating cash flow of Bt70,000-Bt80,000 million per year plus additional debt of Bt20,000 million. The company’s debt to capitalization ratio will peak by 2011, after paying for the investment in the KKD project and making the heavy capital expenditures of Bt94,475 million planned for production and development in 2011. However, the level of leverage is expected to improve in 2012 and 2013, as PTTEP plans to start production in many new projects during 2011-2013. The production of the KKD, Montara, Vietnam 16-1, Bongkot South, M9, and Algeria projects will increase PTTEP’s sales volume, which should generate more cash flow in 2012 and 2013, said TRIS Rating. -- End

Company Rating: Affirmed at AAA Issue Ratings: PTTEP125A: Bt18,300 million senior debentures due 2012 Affirmed at AAA PTEP126A: Bt3,500 million senior debentures due 2012 Affirmed at AAA PTTEP135A: Bt5,000 million senior debentures due 2013 Affirmed at AAA PTTEP145A: Bt11,700 million senior debentures due 2014 Affirmed at AAA PTEP183A: Bt2,500 million senior debentures due 2018 Affirmed at AAA PTTEP195A: Bt5,000 million senior debentures due 2019 Affirmed at AAA PTEP226A: Bt3,000 million senior debentures due 2022 Affirmed at AAA Rating Outlook: Stable ? Copyright 2011, TRIS Rating Co., Ltd. All rights reserved. Any unauthorized use, disclosure, copying, republication, further transmission, dissemination, redistribution or storing for subsequent use for any purpose, in whole or in part, in any form or manner or by any means whatsoever, by any person, of the credit rating reports or information is prohibited. The credit rating is not a statement of fact or a recommendation to buy, sell or hold any debt instruments. It is an expression of opinion regarding credit risks for that instrument or particular company. The opinion expressed in the credit rating does not represent investment or other advice and should therefore not be construed as such. Any rating and information contained in any report written or published by TRIS Rating has been prepared without taking into account any recipient’s particular financial needs, circumstances, knowledge and objectives. Therefore, a recipient should assess the appropriateness of such information before making an investment decision based on this information. Information used for the rating has been obtained by TRIS Rating from the company and other sources believed to be reliable. Therefore, TRIS Rating does not guarantee the accuracy, adequacy, or completeness of any such information and will accept no liability for any loss or damage arising from any inaccuracy, inadequacy or incompleteness. Also, TRIS Rating is not responsible for any errors or omissions, the result obtained from, or any actions taken in reliance upon such information. All methodologies used can be found at http://www.trisrating.com/en/rating_information/rating_criteria.html.