Bangkok--20 Jun--Fitch Ratings
Fitch Ratings (Thailand) Limited has upgraded PTT Global Chemical Public Company Limited's (PTTGC) National Long-Term Rating and senior unsecured rating to 'AA+(tha)' from 'AA(tha)'. The Outlook on the National Long-Term Rating is Stable. Fitch has also affirmed PTTGC's National Short-Term Rating at 'F1+(tha)'.
The rating upgrades reflect Fitch's reassessment that the strategic linkages between the group's petrochemical and refinery (P&R) business and PTTGC's parent, PTT Public Company Limited (PTT; AAA(tha)/Stable), are stronger than we previously anticipated after a business reorganisation over the past few years. Revenue contribution from the P&R business accounted for around 31% of the group total, and the segment made the second-largest EBITDA contribution of 28% after the exploration and production business (36%) in 2018. PTTGC is highly strategically important to PTT's P&R business as a major feedstock off-taker amid its flagship status as the group's key petrochemical producer. As a result, we have revised the uplift on PTTGC's standalone credit profile to two notches from one notch.
KEY RATING DRIVERS
Lower Earnings in 2019: Fitch expects PTTGC's EBITDA to drop to about THB50 billion in 2019 from THB56.9 billion in 2018. This is mainly due to a likely drop in the spreads of petrochemical products and the gross refinery margin in 2019. Lower earnings are also based on our expectation that the sales volume could decline due to PTTGC's planned maintenance shutdown of Aromatics Complex I and a refinery plant in 2019.
High Capex: PTTGC's free cash flow (FCF) is likely to turn negative in 2019 as its operating cash flow is unlikely to cover capex and dividend payments. Fitch expects PTTGC's capex to increase to around THB43 billion in 2019 from THB32.7 billion in 2018 to support the construction of a propylene oxide and polyols project and an olefins reconfiguration project (ORP). FFO adjusted net leverage is likely to increase to around 1.5x-1.6x in 2019 from 0.9x in 2018, before dropping to around 0.6x-1.1x in 2020 and 2021, as capex decreases after the company finishes major investments.
New Capacity; Volume Growth: PTTGC's sales volume will continue to increase in the medium term, driven by its new petrochemical capacity. The company started operations at its 434,000 tonne-per-annum (tpa) liner low-density polyethylene plant and hexane-1 plant in 1Q18 and its 200,000 tpa methyl ester plant 2 in 1Q19. The propylene oxide and polyols project and the ORP, which will be in operation in 2020, will also help drive the company's growth.
Fully Integrated, Low-Cost Producer: The company's large operating scale, wide product range and high utilisation rate result in larger operating cash flow and a higher operating margin than its domestic petrochemical and refining peers. Furthermore, PTTGC benefits from its cost-competitive feedstocks as the majority of its olefins feedstock is gas-based and available domestically, and it has a favourable gas-supply agreement with its parent, PTT, which reduces margin volatility when market conditions fluctuate.
Highly Cyclical Business: PTTGC's credit profile is tempered by the inherent cyclicality of the petrochemical and refining sector. The volatility of product-to-feed margins, refining margins, feedstocks prices, oil prices and working-capital requirements could affect PTTGC's earnings and cash-flow generation significantly. PTTGC is also exposed to supply concentration risk as the majority of its feedstock supply is secured from its major shareholder, PTT. This is mitigated by PTT's strong credit profile and its position as Thailand's leading oil and gas company.
DERIVATION SUMMARY
PTTGC's National Long-Term Rating of 'AA+(tha)' incorporates a two-notch uplift from its standalone credit profile of 'aa-(tha)', reflecting its moderate linkages with PTT. PTTGC is PTT's largest petrochemical subsidiary and flagship company in the petrochemical business, which was evident from the injection of PTT's petrochemical assets into PTTGC in 2017. PTTGC benefits from the gas-supply agreement with PTT, leading to a competitive feedstock cost. The favourable product offtake agreements with PTT also help reduce the margin volatility of its petrochemical products.
PTTGC's standalone credit profile of 'aa-(tha)' reflects its operating scale and large integration to petrochemicals, as well as its low-cost position as a gas-based petrochemical producer. It has the strongest business profile among Thai downstream oil and gas peers, while its financial leverage is low. PTTGC has larger operating scale and more integration to petrochemicals than Thai Oil Public Company Limited (TOP, standalone credit profile of a+(tha)). It also has higher profitability in comparison with TOP. PTTGC's operation and diversification are much larger than that of IRPC Public Company Limited (A-(tha)/Stable, standalone credit profile of bbb+(tha)). In addition, it has a much stronger balance sheet, and better operating profit margin.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer
- Benchmark Brent crude price at USD65.0/barrel (bbl) in 2019, USD62.5/bbl in 2020, USD60.0/bbl in 2021 and USD57.5/bbl thereafter, with PTTGC's crude procurement cost adjusted for applicable premiums
- Market refining margin to soften in 2019
- Aromatic's profitability to soften slightly in 2019 and stay broadly flat thereafter
- Olefins and derivatives' profitability to soften slightly in 2019 and gradually improve thereafter
- THB107 billion of capex over 2019-2023, including committed capex, investment and maintenance costs
RATING SENSITIVITIES
Developments that May, Individually or Collectively, Lead to Positive Rating Action
-Evidence of stronger ties with PTT
-However, positive action on PTTGC's standalone credit profile is unlikely in the medium term, given its modest scale by global standards and high exposure to the commodity petrochemical business.
Developments that May, Individually or Collectively, Lead to Negative Rating Action
-A sustained rise in leverage (measured by FFO adjusted net leverage) to above 2.0x due to large debt-funded investments and/or persistently thin refining margins and petrochemical spreads
-Weakened ties with PTT
LIQUIDITY
Strong Liquidity: PTTGC has strong liquidity, supported by high non-restricted cash and cash equivalents of THB51.7 billion at end-2018. This is more than adequate to cover its THB8.3 billion of debt maturing in 2019 and the likely negative FCF. The debt repayment of PTTGC will increase over the next three years. The large repayments are in 2021-2022, when THB20 billion of Thai baht bonds and USD1 billion of US dollar notes are due. The liquidity is reinforced by PTTGC's strong FCF generation and its ability to raise funds in the capital markets, supported by its low financial leverage.