Bangkok--20 Jun--Fitch Ratings
Fitch has upgraded Thai Oil Public Company Limited's (TOP) National Long-Term Rating and senior unsecured rating to 'AA(tha)' from 'AA-(tha)'. The Outlook is Stable. Fitch has also affirmed TOP's National Short-Term Rating at 'F1+(tha)'.
The rating upgrades reflect Fitch's reassessment of the strategic importance of the petrochemical and refinery business to its parent, PTT Public Company Limited (PTT; AAA(tha)/Stable), after business reorganisation over the past few years. The business, in which TOP is a major component, is more important than we previously anticipated. The petrochemical and refinery business accounted for around 31% of group revenue, while it was the second-largest contributor to group EBITDA at 28%, following the exploration and production business (36%) in 2018.
TOP is highly strategically important to PTT's petrochemical and refinery business as it operates PTT's largest refinery and its refined product sales to PTT are equivalent to around one-third of PTT's oil-retailing business sales. TOP is likely to be PTT's main vehicle in the refining business. In addition, PTT is likely to extend the credit terms for crude supply to TOP, similar to what it provided to IRPC Public Company Limited (A-(tha)/Stable), to alleviate pressure on cash flow during TOP's period of high investment. As a result, we have revised the uplift given to TOP's standalone credit profile to two notches from one.
KEY RATING DRIVERS
Temporary Rise in Leverage: Fitch expects TOP's financial leverage, measured by FFO adjusted net leverage, to increase to 3.0x-4.0x in 2020-2022 (2018: 0.3x) due to large investments in its clean-fuel project (CFP) and an equity injection into associate Global Power Synergy Public Company Limited (GPSC) (A+(tha)/Rating Watch Negative). TOP's financial leverage is likely to reduce to below 2.0x once the CFP commences full operation in 2023. Cash inflow from the sale of the energy recovery unit (ERU), a power generation unit in the CFP, will also help to reduce its financial leverage in 2023.
Flexible Credit Terms: Fitch believes the extension of credit terms for purchase of crude oil from its 48% shareholder, PTT, will provide TOP flexibility to manage its financial leverage and liquidity during its high-investment period. The extended credit terms will help to preserve cash flow and reduce debt funding requirements. PTT has a proven record of supporting its key subsidiaries, which is evident from the extended credit terms for crude supplied to IRPC in 2013-2019. We project that TOP will achieve cash inflow of about THB18 billion from PTT's extension of credit terms in 2020.
CFP Improves Business Profile: The CFP will increase TOP's refining capacity and complexity, which will allow it to produce a bigger proportion of middle and light distillates and refine heavier crude oil. This will enhance its existing competitive advantage as the operator of the country's most complex and largest crude refinery, which accounted for 29% of Thailand's refining capacity in 2018. TOP's complex facilities and high utilisation rate enhance its cost competitiveness, provide crude-sourcing flexibility and allow the company to optimise production for higher-grade and higher-margin products better than its domestic peers.
Business Diversification: TOP's expansion into aromatics, lube base oil, solvents and other support businesses, such as petroleum logistics, power generation and services, has helped to diversify its revenue sources and reduce margin volatility. Higher revenue from a more stable power business, driven by a full year of operation of TOP's two small power producers, should partly offset cash flow volatility in its core refining business. EBITDA contribution from the power business increased to 13% in 2018 due to weak EBITDA from the refinery business as a result of stock losses. The power business usually contributes less than 10% to EBITDA.
Highly Cyclical: TOP's credit profile is constrained by the inherent cyclicality of its businesses and the concentration of its production facilities at one site. The volatility of refining margins, oil prices and working-capital requirements could significantly affect its earnings and cash-flow generation. TOP is also exposed to market-concentration risk, as the majority of its sales are to its major shareholder, PTT. This is mitigated to some extent by PTT's strong credit profile and position as Thailand's leading oil marketing and trading company.
DERIVATION SUMMARY
TOP's National Long-Term Rating of 'AA(tha)' incorporates a two-notch uplift from its standalone credit profile of 'a+(tha)', reflecting moderate linkages with PTT. TOP is PTT's largest refinery subsidiary and flagship company in the refinery business, which is evident in the upcoming expansion of refinery capacity in Thailand via TOP.
TOP's standalone credit profile of 'a+(tha)' reflects the size and complexity of its production facilities. Its business profile is strong relative to Thai downstream oil and gas peers. Its financial leverage will be high temporarily during the CFP construction period but will fall once the project is fully operational. TOP's refinery is more complex and larger than that of IRPC (A-(tha)/Stable, standalone credit profile: bbb+(tha)). TOP also has a stronger balance sheet over the long term and better operating profit margin due to its higher utilisation rate at its plant. However, TOP has a smaller operating scale and less integration into petrochemicals than PTT Global Chemical Public Company Limited (AA+(tha)/Stable, standalone credit profile: aa-(tha)), which also has better profitability due to its large petrochemical operations that have higher operating margins.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer
- Benchmark Brent crude price at USD65.0 per barrel in 2019, USD62.5 in 2020, USD60.0 in 2021, USD57.5 in 2022 and thereafter, with TOP's crude procurement cost adjusted for applicable premiums
- Gross refinery margin to be flat in 2019, and improve in 2020 and stay flat thereafter, before improving after the CFP start-up
- Refinery utilisation rate of 103%-108% in 2019-2022 and about 92% in 2023 when the CFP starts
- Aromatic business's profitability to decrease in 2019, stay flat in 2020 and improve in 2021
- Lube base business's profitability to decrease gradually in 2019 and improve in 2020-2021
- About USD4.9 billion of capex and investment over 2019-2023, including for the CFP with proceeds from the sale of the ERU, committed capex, maintenance capex and equity injection into GPSC
- Extension of credit terms on crude supply from PTT to 60 days in 2020 and thereafter, from 30 days
- 40% dividend payout ratio
RATING SENSITIVITIES
Developments That May, Individually or Collectively, Lead to Positive Rating Action
- Proof of stronger ties with PTT.
- Positive rating action on TOP's standalone rating is not probable in the medium term in light of its large capex associated with the CFP.
Developments That May, Individually or Collectively, Lead to Negative Rating Action
- Thinner-than-Fitch-expects refining margins and petrochemical spreads or an increase in debt-funded investments resulting in FFO adjusted net leverage peaking at above 4.0x during the high investment period and above 2.0x for a sustained period after the CFP commences full operation in 2023.
- Evidence of major CFP execution failures, including large cost overruns or a severe delay in project completion.
- Weakened ties with PTT.
LIQUIDITY
Strong Liquidity: TOP's liquidity remains strong, supported by non-restricted cash and cash equivalents of THB103.7 billion as of end-2018. This is more than adequate to cover its THB6.5 billion of debt maturing in 2019. Fitch expects TOP to generate large negative free cash flow in 2019-2020 due to large capex. The capex will be funded by its large cash holding, flexible credit terms for crude purchase, a THB2.0 billion credit facility from PTT, THB11.2 billion in committed facilities from financial institutions and its ability to raise funds in the capital market. TOP also has a comfortable debt maturity profile, with an average debt life of 13.9 years.